Archives for January 14, 2018

I'd Buy General Electric At The Right Price Too

In a recent interview, Warren Buffett told CNBC’s Becky Quick that he would buy General Electric (GE) at the “right number”, which led to speculation that Berkshire Hathaway (BRK.A)(BRK.B) may currently be looking to get back into a GE position. Let’s remember that it was only a few short months ago that Berkshire disclosed that it sold a small GE position and build its stake in Synchrony Financial (SYF) [a 2014 spin-off from GE]. Since this announcement, GE shares are down over 20% while SYF shares are up over 30%.

Source: Nasdaq

Talk about great timing, right? After a rough 2017 (GE shares were down ~45% compared to the S&P 500 being up ~20%), the company’s stock has actually performed pretty well in the new year. So, what should investors do now? I believe that the “right number” for this industrial conglomerate depends on many factors, including your time horizon, but, in my opinion, you will not get burned if you layer into a GE position at current levels.

My 12-month Price Target

Before the recent run-up for GE shares, I am on record for saying that my 12-month price target was $19 per share. This target still holds true today, even with shares trading slightly below this mark ($18.76 as of January 12, 2018). Some may be asking why a person that is so bullish on GE long-term is standing firm with a price target of $19 but, in my opinion, it is important to note that the real tests (i.e., quarterly earnings reports and management commentary) are still yet to come.

Management already guided for adjusted EPS to be in the range of $1.00-$1.07 for full-year 2018, so, even after the 2017 blood bath, GE shares are not as cheap as what you would expect.

Chart
GE PE Ratio (Forward) data by YCharts

While I believe that Mr. Flannery low balled the 2018 guidance, which is a smart approach given the moving pieces that he will have to contend with, it is still too early to say that GE is a must own at today’s price. GE is trading below the average forward P/E ratio of its peer group but, in my opinion, GE’s management team has a lot to prove before the conglomerate can make the argument that it warrants a valuation that is in line with the likes of Honeywell (HON) or 3M (MMM).

So, at the end of the day, I am sticking with the 12-month price target of $19 for GE because there is definitely going to be concerns (i.e., cash flows metrics, growing debt balance, Power struggles) that the bears will run with in 2018. GE’s 2018 stock performance will largely depend on how management is able to fend off the bears, in my opinion. If successful, $19 per share will be way too low of a price target but it is still too early to tell.

But, on the other hand, there have definitely been some positive developments for GE over the last few months that could result in this company eventually warranting a higher price target later in the year.

Positive Developments

The backdrop for GE has improved since management provided the 2018 outlook in November 2017 but I believe that the two items mentioned below have the potential to be significant tailwinds in 2018.

(1) Oil Prices

The rise in crude oil prices has resulted in a great deal of attention for GE, and rightfully so, as this company is highly levered to the commodity.

Source: CNBC

Remember, GE merged its oil & gas business with Baker Hughes in 2017 to create Baker Hughes, a GE Company (BHGE). No one really knows what will happen with oil and/or gas prices in 2018 or 2019, but it is hard to deny that it has been a great start for these commodities in the new year. And, BHGE has been a direct beneficiary.

Chart
BHGE Market Cap data by YCharts

As shown, BHGE’s market cap has increased by over 20% since late 2016 but it has meant nothing for GE shares, as the company’s stock is down by almost the same percentage over this time period. Let’s think about this, GE still owns a majority stake in BHGE (62.5%) so the industrial conglomerate’s holding is now worth over $26B, or ~16% of GE’s current market cap, and the recent rise has had no bearing on GE’s stock price. BHGE alone is not enough to move the needle for GE, but a rising BHGE stock price will bode well for GE and its shareholders in 2018.

There are rumors that GE may look to spin-off BHGE at some point over the next few quarters (an approach that I prefer), as BHGE’a structure gives Mr. Flannery a lot of optionality, but I would not be surprised if GE retained the majority stake well into the 2020’s.

(2) Promising Policies

GE may not directly benefit from the tax reform bill, as many pundits believe to be the case (a thought that I do not necessarily agree with), but, in my opinion, the downstream impact of this business-friendly policy will have a significant impact on GE. For example, a JPMorgan analyst predicts that the new bill will be extremely positive for the companies of the S&P 500:

“The upcoming reduction of US corporate tax rates may be one of the biggest positive catalysts for US equities this cycle,” [Marko] Kolanovic, who serves as JPMorgan’s global head of quantitative and derivatives strategy, wrote in a client note. “We think that little is priced into the market and hence there is potential for market upside. Clients are not repositioning portfolios until they see the reform passed.”

The importance of tax reform to that call can be seen in the breakdown of JPMorgan’s earnings growth forecast for next year. The firm projects that half of earnings upside — or roughly $10 a share for the S&P 500 — will be due to a successful GOP tax bill.”

Joe Ciolli, JPMorgan’s quant guru says traders are waiting for tax cuts to unleash more stock market gains, Dec. 15, 2017

The tax bill has already started to have an impact, as analysts’ EPS estimates for 2018 have increased by 2.2% (to $150.12 from $146.83) from December 20, 2017 to January 11, 2018.

Source: FactSet

Full Disclosure: the 2018 bottom-up EPS estimate is an aggregation of the median 2018 EPS estimates for all of the companies in the index.

The 2.2% may not sound like much but it is the largest move over this specific period of time since FactSet began tracking this data in 1996.

Additionally, analysts are bullish on several sectors that GE operates in.

Let’s just remember that this industrial conglomerate operates in industries that are critical to the U.S. economy so GE will benefit as other industrial companies benefit from the tax bill, of course in my opinion.

And a Trump infrastructure bill in 2018 would simply be icing on the cake.

Risks

The main risk for investing in General Electric starts with management. There is no guarantee that Mr. Flannery is the right man to turn around a company that is widely viewed as a directionless, complex industrial conglomerate. Sentiment is the number one factor for GE shares being down by almost 50% in 2017 so shareholders are putting a lot of faith in a largely unproven leader, at least on this type of stage.

Another risk factor is the Power operating unit. Any additional downward pressure for this unit will not bode well for the consolidated results in 2018 or 2019. Management has big plans for Power over the next 24 months so investors should be paying close attention to the progress that is being made toward rightsizing and reshaping this unit for the future.

Bottom Line

The market is flying at (or near) all-time highs and many stocks, including GE shares, have enjoyed a nice ride so far in 2018. I believe that there is a lot to like about GE as we head into 2018 and beyond, but this company’s new management team has a lot of prove over the next 12-18 months. Therefore, investors that think that they missed the boat when shares were trading at (or below) $18 per share will likely get another opportunity at some point in the first half of 2018.

However, looking out, I believe that this industrial conglomerate is attractively valued if you are willing (and able) to hold onto shares for at least the next three-to-five years. Investor sentiment is the main culprit for the poor performance for GE shares in 2017 and I believe that shares will rocket higher if Mr. Flannery is able to sell the market on his “plans” for this industrial conglomerate. That is why I, a person that plans to hold GE for many years, will not sell my GE shares now and try to get back in under $18 because timing the market is hard to do (or should I say impossible?). As such, investors with a long-term perspective should consider layering into a position at today’s levels because, in my opinion, GE shares have the potential to be trading significantly higher in the years ahead.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, BHGE, BRK.B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

GLD: Is 'It' Happening?

Introduction

On Friday, the dollar index fell to a low not seen since late 2014. Continued weakness in the dollar will lead to inflation in all dollar-based commodities like gold, crude oil and agricultural products.

Next week, the U.S. financial markets will have a shortened holiday week. There are big political issues looming, like a potential shutdown of the U.S. government, and an ongoing battle over immigration reform. As a result, the week ahead could see continued volatility in the U.S. dollar – either up or down. These moves in the dollar will likely affect gold, crude oil and other commodities – one way or another.

Is IT Happening?

Is this the beginning of the dollar collapse? Is that why Bitcoin and other cryptocurrencies have risen so far, so fast? Does the pending yuan-based oil futures contract lead to the end of the petro-dollar? Is that why oil has risen so far, so fast? Is IT happening??

Will the U.S. government shutdown close its doors amid political posturing and theater? Will the political climate in Washington, D.C. get even worse? Will the Democrats invoke articles of impeachment on Donald Trump? Will the U.S. and its allies attack Iran?

Should I go “all in” on the SPDR Gold Trust (GLD) to profit from all of these potential events? Or will all of these storylines get resolved, and leave the gold bulls, once again, kicking air instead of a football – and landing flat on their backs?

Gold Divergence from Real Interest Rates

The price of gold has historically had a close correlation with real interest rates. Since the beginning of 2017, however, gold and real interest rates have seen increasing divergence. Is this a sign that we have entered a new era where the old correlations are no longer valid? Possibly.

For the price of gold and real rates to converge again, 5-year real rates would need to fall precipitously below zero. Or gold would need to fall below the 2016 lows. Or, some combination of the two. We can see that real interest rates have hit a peak in late December of every year since 2013 before correcting lower.

Gold is money. However, it is currently traded as a paper derivative. I can’t (and won’t attempt to) predict the day when gold will be set free from its paper chains. I view physical precious metals as a store of value and an insurance policy to protect against macro market risks.

Meanwhile, since I closely track gold and silver, I also swing trade “paper” gold and silver on a short term basis – both long and short – with an eye on several traditional and proprietary indicators.

GLD Charts

The weekly gold chart continues to look bullish, although is nearing an over-bought RSI signal. On a purely technical basis, I would expect at least a pull-back to the uptrend line and/or $124 at some point.

On the daily chart, we can see that GLD came back into a prior uptrend channel. If GLD continues upward, then in hindsight we might describe the drop below the channel as a “bullish under-throw.” GLD is over-bought on the daily RSI.

Gold COT Report

I view the gold COT to be neutral, perhaps slightly cautionary. In the week ending January 9th, the net commercial short interest increased by 23%. When price increases, the commercial banks tend to create paper gold to satisfy paper gold demand.

Peaks in net commercial short interest have almost always coincided with nearby sell-offs, and valleys in commercial short interest have almost always coincided with nearby rises in price. One should be careful when trying to “time” tops or bottoms based upon the COT report, for at least two reasons: 1) the COT report is published on Fridays with Tuesday’s data, so it is three trading days old, and 2) the bullion banks have demonstrated patience in covering their shorts, and it could take many weeks for the COT data to look meaningful in hindsight.

While the gold commercial short interest has increased rapidly from its recent low, it only recently crossed over its 3-year average. And net commercial interest is below recent highs.

Gold OPEX Price Magnet

I closely track the options market for gold, crude oil and natural gas and have created a program to calculate OPEX price magnets for these commodities. Here is a recent history of the gold futures price versus the calculated OPEX magnets.

Since June 2017, the futures and OPEX price magnets have tended to converge onr or before the options expiration date. The next option expiration date for COMEX gold is January 25th, 2018.

The OPEX price magnets that I have developed are related to the “max pain” theory. This Youtube video does a good job at describing the “max pain” theory. There are free max pain calculators online for publicly traded stocks; however, the OPEX price magnets are in my view more relevant and are calculated on futures contracts.

Conclusion

Rising gold prices, a weakening U.S. dollar and divergent real interest rates may provide evidence that gold is regaining its luster as a unique “safe haven” asset. Historically important correlations appear to be broken, and the dollar is setting multi-year lows. Add to this mix increasing political and geo-political risks, and we may have a formula for “IT” to happen. Gold could soon be free of its paper chains, and ETFs like GLD could continue to rise in value – and perhaps move sharply higher.

On the other hand, we might be witnessing beginning-of-the-year allocations and adjustments that become an eventual “nothing burger” for GLD and other gold-related investments. If we continue in the old paradigm, then I see reasons to be cautious for paper gold investments like GLD. GLD is over-bought on its daily RSI, and real interests rates could drag lower. Moreover, the nearby gold OPEX magnet suggests that gold could pull back before the end of January.

I wish all of you the best of luck navigating this interesting market.

Disclaimer

This article was written for information purposes, and is not a recommendation to buy or sell any securities. I never intend to give personal financial advice in any of my articles. All my articles are subject to the disclaimer found here.

I am currently offering a two week free trial.  In addition to my daily content, I also have good input from my subscribers in the chat section.  Come and check it out.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am always net long precious metals in various forms, and currently hold out-of-the-money GLD puts as a hedge.

Trump's 'Shithole Countries' Comment Tops This Week's Internet News

Last week Facebook decided that maybe it should make some changes to the information people see on the platform; also, a lot of people got very interested in the pay discrepancies between Mark Wahlberg and Michelle Williams. But, beyond that, it was also a week where everyone learned that a school kid could play the Cantina Band song from Star Wars with a pencil.

Yes, it was yet another strange, wonderful week on the internet. But what else happened? Here we go.

President Trump’s Unsavory Comments

What Happened: President Trump reportedly referred to Haiti, El Salvador, and some African nations as “shithole countries.” The internet responded in kind.

What Really Happened: There is absolutely no denying that Trump has had an impressively full week, declaring himself a stable genius, denying the possibility that he might be deposed as part of the Russia investigation, and avoiding Kendrick Lamar. But it was his comments reported Thursday that will likely have the longest-lasting impact.

Oh.

Some were concerned about journalistic standards…

…but many more were concerned about presidential standards, instead.

Naturally, media reports came fast, furious, and horrified. As the fallout from the comments continued, perhaps the most surprising reaction was the fact that the White House didn’t even try to deny it initially.

And they weren’t the only ones failing to denounce Trump’s crude language.

Still, at least one prominent conservative was willing to correct Trump.

As some of the countries mentioned started asking for comment on the comments, Trump said this:

Well, that’s what he said publicly, at least…

The Takeaway: Twitter?

Breitbart Says Goodbye to Bannon

What Happened: Apparently, when shadow presidents fall, it happens quickly and they even lose their satellite radio shows. Sorry, Steve Bannon.

What Really Happened: As those reading Michael Wolff’s Fire and Fury book know, there is one figure that looms arguably even larger throughout the entire thing than Trump himself: self-proclaimed genius (hey, another one!) Steve Bannon. Turns out, the ego-stroking he might have gotten from the book was likely a farewell gift, considering how the rest of his week went.

Yes, Bannon has lost the Breitbart job he swiftly returned to after leaving the White House back in August, despite releasing a full-throated walk-back of his comments in the Wolff book. So, what happened?

That’d do it. Sure enough, Breitbart was tweeting about his departure.

But it wasn’t just Breitbart that dumped him, it turned out.

(Bannon lost his Sirius show because it was a Breitbart-related venture, for those wondering; it wasn’t a coincidence, just cause and effect.) As would only be expected, news of his departure was everywhere in the media, but how did the rest of the internet respond?

It wasn’t only glee at Bannon’s misfortune, of course; some were also wondering just who could replace him at the outlet. Or maybe that should be, “what.”

The Takeaway: If only there was some kind of lesson to be learned from the swift rise and fall of Steve Bannon. Maybe it’s this?

The Leak of the Week

What Happened: In a political environment consumed with the concept of leaking, a surprise release of previously secret testimony to Congress took the internet by storm.

What Really Happened: Despite what certain POTUSes might have you believe, the investigations into potential collusion between the Trump campaign and Russia are ongoing, although at least one—the one being carried out by the Senate Judiciary Committee—is running aground thanks to internal strife between Republicans and Democrats on the committee. At the start of the week, one of the topics causing the most upset was the testimony of Fusion GPS co-founder Glenn Simpson over the origins of the company’s infamous “Russian dossier.”

Simpson testified in a closed session in August, but faced new calls from Republican committee chairman Chuck Grassley last week to testify again, publicly. Simpson and co-founder Peter Fritsch, in an op-ed that appeared in the New York Times, argued that Congress should simply release the transcript of his earlier testimony. Things seemed at an impasse… and then they didn’t. What changed?

People were surprised at how hardcore the move was…

…especially after Senator Feinstein responded to questions about why she did it.

This kind of thing is, well, unusual to say the least, so of course it was everywhere almost immediately. The 312 page document was, unsurprisingly, very enlightening.

This was, in other words, a really, really big deal. Although what kind of a big deal apparently depended on which side of the ideological spectrum you were on.

Expect this one to run and run.

The Takeaway: Actually, wait, we never checked in on how Trump responded to this news. Mr. President?

She Is Spartacus

What Happened: When it looked as if a news story was going to out the creator of a secret list of crappy men, the internet took it upon itself to handle the situation first.

What Really Happened: Perhaps you heard of the “Shitty Media Men” list before last week; it was a Google spreadsheet shared and edited anonymously that listed more than 70 men who were accused of being, to some degree, abusive towards women, whether it was creepy DMs or physical and sexual abuse. Since its creation in October of last year, it’s been the topic of much speculation and discussion, not least of all because no one actually knew where and how the list got started. And then, last week, that all changed.

It all started with a thread from n+1 editor Dayne Tortorici.

There’s much more in that thread, but those are the most salient points. Tortorici’s comments prompted a response from journalist Nicole Cliffe, and follow-ups from other journalists and editors.

It turned out that the writer of the piece, Katie Roiphe, was willing to comment that she was not about name anyone involved in the list.

Maybe the creator(s) of the list wouldn’t be named, and there was no need to worry about doxing! Well, OK, that was unlikely (for reasons we’ll soon get to). But then, something wonderful happened.

Indeed, so many women came forward to claim responsibility that a hashtag was created, #IWroteTheList, to share collective responsibility:

And then, the real author stepped forward.

Donegan’s piece for The Cut had an immediate impact.

The Takeaway: Nicole Cliffe, want to wrap this one up?

The (Flagging) Power of CES

What Happened: Someone at CES 2018 took the idea of “lights out” a little too literally.

What Really Happened: What would be the most unfortunate thing to happen at a trade show where electricity is kind of important?

Yes, the 2018 Consumer Electronics Show was hit by a twohour power outage last week. Before the cause was known—apparently, it was just rain—some people had some… special theories about what was happening.

Others were just philosophical about it all.

Some were even wondering who “won” the blackout. To be fair, a couple of brands definitely tried their best to claim the crown.

Ultimately, though, the answer to who won is fairly obvious, surely.

Some people at the show really seemed to enjoy the darkness, even if they didn’t make off with any free gifts. Hell, some went to so far as to hope it wasn’t a one-off.

The Takeaway: Of course, it’s worth keeping some sense of perspective about things…