Trade Alert: Taking profits on AMAT as stock market risks rise
I still think we want to be mostly long and that the market backdrop is positive for stocks. I also like the idea of outright bullishness right now if only because it’s rather unique to hear someone outright bullish right now. Is it most contrarian to be outright bullish right now? Good question.
All that said, the fact that there’s a few trillion dollars of corporate debt in the energy and commodity sectors that are at some point likely to have to be recapitalized and the potential spill over effect of those trillions in losses out there that have to be dealt with and probably sooner rather than later…there’s increased risk of a major market melt-down — and this is the first time I’ve written that “there’s increased risk of a major market melt-down” in a long time. Years in fact.
I don’t think I’ve had a reason to be this concerned about the corporate economy and the stock market since 2008 when I’d gotten so bearish about real estate and the risks that were rising from crashing real estate prices. This time it’s crashing energy and commodity prices.
We know that energy alone accounts for nearly $2.6 trillion in corporate debt according to the Bank of International Settlements. Add another couple trillion that other commodity companies are carrying on their balance sheets and pretty soon we’re talking real money. That said, for some comparison purposes, note that the US mortgage debt market was more than twice as big as the crashing energy/commodity corporate debt market at about $13 trillion.
The biggest difference between the crashing real estate market in 2008 and the crashing energy/commodity market is that it’s just at few hundred corporations and a handful of smaller commodity-dependent governments that are finding themselves underwater and unable to make their payments vs the hundreds of millions of households that were affected by crashing real estate prices in 2006-2010.
This time, hundreds of millions of households are benefitting from lower energy and commodity prices and that’s a good thing for you and me and for the economy. Investing successfully over time is a matter of managing risk and we don’t have to be all in or all out at any given moment. I do think there’s reason to be cautious and to have more cash on hand right now than we did at any point in the last few years, and that’s exactly how we’re set up, as I continue to want to own the most Revolutionary companies on the planet.
Now for one Trade Alert and a few other notes.
*I’m going to go ahead and take our profits on Applied Materials here. AMAT sells equipment that companies like Intel and Samsung and Micron and TSMC use to to make their semiconductor chips that run smartphones, PCs, cars, cameras, refrigerators, etc. The spending cycle from Amat’s customers isn’t lining up as clearly as I’d like it to be for the next year or two as Samsung and Intel and Micron all seem to be struggling with their technological roadmaps ahead, each for very different reasons. When AMAT was near $14 a share, it gave us the chance to buy this stock at about 8x next year’s earnings estimates, but with the stock at $18 and next year’s earnings estimates looking more challenging to meet, the stock isn’t nearly as low risk as I’d like it to be here. I want to go ahead and lock in my profits so I’m selling my AMAT and removing it from the portfolio for now.
*Now for an update on the new short in the portfolio, Kandi Technologies, KNDI. I’ve been unable to locate enough shares to borrow to short-sell the stock though eTrade is offering to lend me some shares at a 23% interest rate. That means the stock has to drop at least 23% this year for one to break even on any shorted shares. I noted in yesterday’s KNDI Trade Alert that I was bidding for a few KNDI puts dated out into June 2016 and January 2017 with $10 strike prices and I got filled on a few of those so I am going to just stick with using the puts instead of shorting the common stock.
*“F5 Networks names John McAdam its new pres. & CEO, replacing Manuel Rivelo who is resigning due to ‘personal conduct’ not related to the company.” Well-handled by $FFIV. I wonder what the now ex-CEO did but regardless I’ve known John McAdam for many years now and I think he’s the right guy to be running the ship there again anyway.
*I’d rather $AAPL not be in the currency trading business at all, but at least they got lucky this year. “An extremely well-timed currency hedging regimen saved Apple Inc. about 70 cents a share — or $4.1 billion — in earnings during fiscal year 2015, analysts at Stifel said in a note released last week. Apple expanded its hedging efforts in the second half of 2014, the analysts said, just as the dollar rally was heating up.”
*Pandora, our oft-winning short position seems like its perpetually in court over royalty payments. Here’s a well-written article explaining how Pandora’s model works and why they find themselves in this situation:“The copyright judges have given no clear signals of how they might rule, but analysts expect that their decision might well add to Pandora’s burden. Pandora wants its rate lowered, but those representing the music industry are asking for a significant increase. ‘Anything other than the status quo is going to be dreadful for Pandora, because it means that the challenge for monetizing content is going to be that much higher,’ Ms. Enders said.” I’m still short some of my Pandora trade but I have taken some profits since it crashed from the low $20s.
*GW Pharma has been crushed in the last week or so, falling 20%. I think $GWPH has a long ways to fall from here still, but as always, I’m nervous about shorting a stock. But I do think $GWPH could be a teenager (in the teens) before it’s all over.
