WASHINGTON, September 17, 2014 – It’s official. The U.S. Federal Reserve Bank is ending its QE bond-buying program in October as promised. But the eagerly hoped-for words “a considerable time,” remained in its statement today, assuring investors that interest rates would be going up, but not very soon.
The market has been in turmoil over the past week, with HFTs, algos, and active traders freaking out that the Fed’s free interest-rate ride would be terminating earlier than expected, perhaps by the end of this year. That likely won’t happen now, although rates are still expected to start creeping up in 2015.
The market was up big after the Wall Street Journal’s Fed guru Jon Hilsenrath telegraphed the Fed’s likely move in a Tuesday piece. It tried to pick up the rally on low volume this morning but began to seriously falter around lunchtime today, heading back for the red ink.
The other item keeping the market on edge this week is the incoming Alibaba (BABA) IPO, slated to be priced after tomorrow’s close. The shares will begin trading on Friday, September 19 in U.S. markets.
Underwriters caused a bit of turmoil Monday when they announced that the likely pricing of the new BABA shares would be kicked up a bit, to a range of $66-68. Though the price increase was minimal, it came on top of an announced increase in the amount of shares to be offered, perhaps spooking investors who still remember how that greed game worked out for the disastrous Facebook IPO.
One more day, and we’ll know how this game turns out.
Meanwhile, all the other happy nonsense is continuing. We’ve raised a lot of cash, but will consider re-entering the market with more or newer positions if things stabilize. But not until Alibaba is out of the way.
We pulled out of our Yahoo! (YHOO) proxy position in phases yesterday. We may regret this. The stock is up a dime or two from where we dumped most of our shares for roughly an 18% over-all profit—not bad for a 6-week phased-in position. Even though Yahoo! is modestly positive today, we’re not going back in right now, although we may play a game with some options tomorrow, just because.
YHOO was a nice ride, given that we, like most of you, will never get any Alibaba shares on the IPO offer. That’s a game reserved only for the 1%, not uncommon when free money is given out, something we’ve carped about before. But don’t expect “da boyz” to give up their perks to the likes of us anytime soon. The U.S. is rapidly heading toward banana republic status and this is one of the reasons why.
That said, we had a convenient proxy in YHOO, and the play may still have a bit of juice in it yet if BABA has a big pop on Friday. But these things are largely unknown, except, of course, to the HFTs, which will try to manipulate things their way whilst evading the new CME rules meant to short circuit their illegal fun and games.
Right now, until the market settles down, we’ve gradually gone about 65% cash, sustaining a few losses but grabbing a few outsized gains in the process, particularly in YHOO and a few other special situations, including some Bank of America (BAC) warrants (BAC/WS/A at Schwab, different symbols elsewhere).
We started cautiously climbing back into those warrants today, violating our own judgment, and will add to that position every time the warrants take a considerable clobbering, though they may not. BAC is likely near the end of its long nightmare of massive, successive Federal government penalties, assessed against it largely for the sins of Countrywide, which the Feds had actually coerced it into acquiring during the 2007-2009 disaster.
Typical of this administration, penalties were assessed against BAC and its tax-paying stockholders, of course, rather than against Countrywide and BAC officials, all of who donate heavily to the Democrats. Unfortunately, the public, including investors, are disinclined to pay attention, thus encouraging this rottenness in Denmark, er, the U.S.
At any rate, major banks are likely to be perhaps unexpected beneficiaries of the Fed’s ultimate interest rate rises, likely now in 2015. This would make loaning out money a profitable business again, little by little. And this, in turn, would likely lead to more work and perhaps even higher salaries for the legions of Americans who are currently unemployed and underemployed.
Bank stocks like BAC, and perhaps even more, Wells Fargo and the regionals, would benefit greatly from this, and bank stocks would likely begin a slow, relentless march upward.
Bank stocks tend to be boring in general. But these turnaround modes, the likes of which we last saw after the late 1980s Savings and Loan debacle, can produce surprisingly large stock profits if you have the patience to wait.
The waiting process used to be more pleasant, giving that most banks boasted outsized dividends. Today, quite a number of banks, particularly BAC, have tiny dividends as dictated by the Fed. But as this changes and as dividends creep back toward normal percentages, i.e., 3-5% or so, sitting on the shares of a well-chosen bank or three could prove quite lucrative, again if you take a 3-6 year perspective.
That’s not very fashionable in today’s Internet driven world. But in this case, it might work wonders. We’ll be talking about banks more as this scenario starts to develop.
The only other trades we’ve made over the last two ways were targets of opportunity. For disparate but clearly unfounded reasons, plus stampedes of stupidity, shares in Douglas Dynamics (PLOW) and Omnivision Technologies (OVTI) got pancaked Monday due to wave after wave of relentless selling.
Douglas Dynamics, a big manufacturer of snow plows and related equipment, (hence its clever trading symbol), was downgraded by an analyst who must operate out of a Florida condo. Said analyst feared that there wouldn’t be much snow this winter which would kill PLOW’s business model.
Most real climate scientists are expecting quite the opposite this winter, so possibly this analyst is one of those die-hard fanatics who still actually believe that
global warming climate change is “real” and not the hoax it’s been proven to be. At any rate, we zipped in at the bottom of this panic, and we’re already up. Of course there’s a long, uncertain winter ahead. But we feel better now with some PLOW power in our portfolio.
Meanwhile, OVTI got hammered almost as bad as PLOW, which again was bizarre. OVTI makes the mini-camera gear for iPhones and stuff, and also supplies cameras to the auto industry, where safety cameras are becoming de rigeur even on cheaper automobiles.
Given that iPhone 6 pre-orders and orders seem to be hitting historic numbers, how in Hades is OVTI NOT going to be making lots of money on these new phones? Since Apple (AAPL) shares are pricey if you like to purchase stocks in round (100 share) lots like we do, stocks like OVTI that make the stuff that goes inside the iPhone are great proxies for Apple stock.
For every new iPhone sold, OVTI sells another mini-camera. The math is simple and compelling. So we picked some of this up as well and we’re also up on the shares as we are in PLOW. Simple, easy, though this tactic doesn’t work every time. OVTI shares likely were just a victim of Monday’s savage, unscripted, generalized tech selloff.
We recently got hosed, for example, picking up shares in Kinder Morgan (KMI), which regularly gets savaged by Barron’s for some unknown reason. It’s a long story, but Barron’s seems to win these round, and when we chase a stock like this, we tend to get hit again.
That said, as in unambiguous cases like PLOW and OVTI, a pair of those rare occasions when you see monumentally stupid selloffs taking place, getting in as the mini-panic bottoms is at least good for a quick trade and possibly a whole lot more.
In spite of the moves we’ve just described, though, we’re holding fire for the most part until this market decides where it really wants to go. Might be a good idea for you, too.Click here for reuse options!
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