Michael Steinberg
Investment Research and Consulting
Buy Now!
The period from Dec. 21 through Dec.29 is an incredible buying opportunity going into the new year. Omicron fears are the headline driver, combined with tax selling have created opportunities across the board in both income stocks and micro to mid-cap Nasdaq stocks. The sell off caused by fears of the pandemic again slowing the economy through supply chain disruptions is exacerbating year selling.
I anticipate a continued downward trend across the board until the 29th of December when the tax selling is over and any new purchases will settle in the new year. Institutions will use the price drop as an opportunity to window dress their portfolios into the new year. Individual investors will have the opportunity for immediate gains, historically averaging about 6%.
I am currently recommending five issues that pay an average of ten percent annual dividend. This portfolio is spread across the market including a precious metals fund, a REIT, a mid cap lending fund, an old line mid cap fund, and a capital development fund.
Michael14Steinberg December 21st, 2021
Posted In: Uncategorized
Buy the Future
I note that I have not posted in the past year. The explanation is simple. The social and political divisiveness compounded by pandemic restrictions and government largess have made any rational predictions concerning the economic markets virtually impossible.
Government handouts sloshing through the system have driven the markets to what I believe are unsustainable levels. Nevertheless, irrational exuberance can persist longer than any short can remain solvent. Meme stocks have become the rage and I frankly cheer average investors coming together to pressure institutional markets. Nevertheless it should be remembered that ninety percent of trading is on the long side compared to ten percent on the short side, yet fifty percent of trading profits are made on the short side of the market.
Michael14Steinberg October 5th, 2021
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The Short Squeeze
The recent trading frenzy and massive short squeeze in Gamestop was a welcome change. The hedge funds got taken to the cleaners by the concerted effort of the social media traders. It was nice to see the Wall Street crowd hoisted on their own petard, but the situation is unlikely to end well for most of the Robin Hoodies and others. What goes up must go down and Gamestop has already begun its slide. The issue with playing on a short squeeze is the buying dries up once the shorts have covered. Without that demand, holding a played out stock is dealing with the burning match. Who is left holding it? The answer is already here as Gamestop continues to sink.
In Washington there are already cries to put checks on the system and investigate both short selling and the social collective buyer’s forum.
It’s all bullshit. The rules are already on the books. The real problem is the lack of enforcement by the SEC. The rules for short selling are clear. Before a firm can sell short they must either have shares in their inventory or have made arrangements to borrow stock for delivery. It is a rule honored oly in the breach. Repeatly over the past thrity years I have seen numerous stocks attacked by short sellers, supported by major trading firms where there was no stock available to borrow or buy, yet the SEC does not enforce the rule resulting in situations where well over 100% of a company’s stock has been sold short without any cover. Merrill Lynch was a leader in this scam during the 1990s, now it seems every big player whether a firm or a hedge fund has entered the game with a wink to the SEC.
And yet there is a claim of a level and transparent market even as our politicians pass rules preventing legislators from insider trading even as they do it on a daily basis with hardly a comment unless it is done by a legislator who is politically out of favor.
If you are going to play with the herd you had better be nimble or you are likely to get trampled.
Michael14Steinberg February 2nd, 2021
Posted In: Uncategorized
How High is High?
I have been inordinately quiet during the months of pandemic lockdown. The free flow of money coming from the government and the rise of the Robin Hood traders have made me wary of the markets as P/E ratios vault towards the heavens. Despite my fears I also realize that with the Fed committed to zero interest rates, there is literally nowhere else investors can put their money with any hope of a nominal or above normal return. This presents a quandary for retirees and pension funds driving them into investments that will ultimately end badly. But not right now.
The flow of money sloshing through the system that will be added to by any stimulus program is likely to drive the market higher at least through January 15th, an options expiration date.
I have avoided individual stocks during this run up and I know I have missed many opportunities as I have stocks on my watch list that are up between 300-900% this year. I considered them over priced before the run up started and now view the ratios as astronomical. There is a feeling of the Emperor’s New Clothes as I watch ridiculous valuations for many of the IPOs coming to market.
Having said that, I have not been sitting on my hands. Not trusting individual stocks, I have not fought the trend and instead have been trading options on ultra short ETFs that track the various indices. They are generally cheap and unloved, but during each monthly period have provided returns in excess of 60%. These are not for everyone, but they are low risk in the amount of capital devoted to the options, (i.e. maximum loss is the premium purchased) and provide ample opportunity for vertical spreads.
At some point, probably after February 2021, the market will roll over and the question investors will be confronted with is whether the pullback is a normal correction providing another buy the dip opportunity or the start of something more serious.
I believe that as the pandemic proceeds it will change forever many industries and business practices resulting in unexpected upheavals. I anticipate that the rotation will be fairly swift with many industries falling out of favor as changes caused by the pandemic become ingrained in the economy. I do not see the entertainment, leisure, and travel industries having any significant recovery prior to June of 2022.
Yield investors are going to have a rough time until the economy achieves some form of normalization.
The true issue in coming years will be the value of the dollar relative to other world currencies and whether it can retain hegemony.
Michael14Steinberg December 11th, 2020
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Market Meltdown
The stock market has been frothy for some time, pushed ever upward by a solid American economy and excess capital sloshing through the system from the Federal Reserve’s easy money policy. As I have watched the price earnings multiples being pushed to ridiculous levels, I have been waiting for an extraneous event to trigger a major correction or even a full blown bear market.
During the 1970’s I had occasion to study the course and progress of disease vectoring. Accordingly I have followed with both interest and trepidation the progress of the Coronavirus outbreak. It amazes me that White House officials are down playing the seriousness and pandemic nature of this outbreak. It is not merely the community spread aspects or the anticipated higher death rate than the yearly flu or the fact that the disease is spreading with more severity among the elderly, the immune compromised, those with diabetes, and individuals with heart disease. Rather, what is of greater significance is the international reaction to the spread of the disease. A new tribalism has set in as nations close borders in hopes of stemming the spread of the Coronavirus.
I do not intend to go over the numbers involved, suffice to say that once the disease has broken out of containment, a pandemic is inevitable. What is relevant is the economic ramifications from governmental responses.
The unbridled fear of contagion is causing demand destruction on an almost unparreled scale. It is one thing to delay a planned purchase of a manufactured good. It is an entirely different matter when concerts, sporting events, business conclaves, and many large gatherings are cancelled. The annciallary losses to hotels, airlines, anf cruise lines is economic activity lost, never to be regained. We have already seen smaller airlines go out of business. Hoarding has set in, which is ridiculous as the ill become unable to even get tissues or toilet paper.
Nor does this take into account disrupted supply lines for manufacturing, including base materials produced in China for medications. Ideas are being floated in Washington and other capitals concerning how to deal with these losses. Washington’s assumption is that the virus will dissipate or even disappear when the warmer summer months roll in.
I heartily disagree. I believe instead that we will just be hitting the peak global infection rate by mid-May. Pandemics do not conveniently disappear because we wish it so. I believe that the disruption caused by the virus will continue well into the third quarter.
Barring some kind of miracle I believe it is inevitable that the economic fallout will bring at least a short term end to the long running bull market. Further that when the first and second querter earnings start rolling in we will find that we entered a recession during the first quarter. Market drops feed on themselves as margin calls exacerbate selling and even safe havens such as gold are not immune as traders sell gold, which has been rising, as source of ready cash to meet margin calls and raise capital against a market bottom.
It is going to be a rather long wait.. Very nimble traders may make a lot of money playing the daily swings, often over a 1000 points on the Dow. As for me, I am sitting on my hands and creating a shopping list of options trades for when the market finally finds a floor.
Given my expectations, barring a flood of new money from the Fed, market volatility, fear of a looming recession, and earnings contraction could easily drive the Dow down to 15,000 or lower. The financial devastion and fear among the retiring baby boom generation will create a spreading fear of financial panic and demands upon Washington to do something, anything, to make things right. Unfortunaely given the size of the Federal debt, not even including contingent obligations, the Federal Reserve will have its hands tied unless they are willing to risk negative interest rates and possible default.
Hang onto your hats folks. The ride is going to be very bumpy with the possibility of huge losses and for the nimble, huge gains. When you create your buying list, look to the traditional defensive companies such as makers of medical supplies and necessary consumer items such as tissues, toilet paper and soap. Other areas to look at are the beaten down tech stocks that should spring back as their supply lines are reestablished.
If you must play this market, do it with options, but never, ever sell a naked call.
Michael14Steinberg March 12th, 2020
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Screwing the Shareholders
The reality of stock buybacks and interlocking corporate directorates.
For some time I have been warning about the decline in the number of stock issues traded. The problem has been acerbated by mergers and corporate buybacks. This has resulted in stock prices being driven higher as the inflow of money to RTFs and mutual funds searches for a home. Often this results in prices being driven to unrealistic price earnings multiples while at the same time screwing the shareholders.
Theoretically buybacks are intended to enhance shareholder value by lessening the outstanding number of shares, thereby driving up the earnings for the remaining shareholders. Buybacks supposedly make a statement that the stock is cheap and that it represents a better use of a company’s assets than buying other companies or reinvesting the funds in the capital growth of the company. The reality is far different. If in fact management cannot find a productive use for excess funds, shareholders would be better served with a special dividend distribution.
The shareholder screwing really begins with corporate governance and the go along, vote with management, attitude of outside advisors. Many large corporations have interlocking boards of directors. The problem is not as pervasive as the Japanese Keiretsu, but it is similar.
An example is as follows: CEOs of companies may serve on as many as twelve boards of directors outside their own company. John J. of ABC corporation has turned in an outstanding performance. As a reward, the board grants him a large pay package plus stock options. Mope W. of XYZ corporation has seen his company drop fifty percent in profits. However, since many of the board members sit on the each others boards and are part of the “old boys” network, it is deemed only seemly that Mope W. should be rewarded with a similar package. Remember please that these stock awards are from treasury stock and represent as substantial bite out of shareholders equity.
Buybacks are supposedly made when a stock price is considered cheap and a prudent investment in the company’s future. In reality, a close study of stock buybacks indicates that these programs are often announced when stock prices are at or near new all time highs and just after stock incentives have been awarded. Statistically, a buyback announcement almost immediately pushes the stock price by 2.5%. All this might be good if the stock incentives were tied to a holding period and based upon performance. Often as not however, the buyback announcement gives insiders the opportunity to immediately cash out. This is outright theft from the shareholders.
The problem has been highlighted since the early Nineties as executive compensation skyrocketed reaching a ratio as high as 550 to one compared the salary package of the average production worker.
Quite simply the one per centers who sit on corporate boards, line their own pockets with equity snatched from shareholders by the fiat of the board of directors. Is it any wonder then that we have seen the incredible growth in income inequality?
Remember that the contracts for outside advisors to pension plans, insurance companies, university trust funds, as well as many bank trust departments, are voted upon by the same board members. What advisor is going to recommend going against management?
And lurking behind all these machinations is the ever present mystical algorithms. It is only a matter of time before a fat finger or an outlier algorithm sets off a cascade effect. It is impossible to say when the next recession will come. The trigger could be any number of gray swans that turn black. Examples might be a hard Brexit, a recession in Europe, a collapse of the Chinese credit market, a full blown trade war, or a miscalculation by the Fed. It is certain that we will have another recession, possibly not until 2021, but it will come and you may rest assured that given the number of weak spots in the American economy, from student loan debt, to increasing consumer debt, to increasing interest on the Federal debt, the next market collapse will be a humdinger and quite possibly will devastate baby boomers retirement plans as well as the rest of the economy.
Michael14Steinberg February 25th, 2019
Posted In: Uncategorized
The Case For A Continued Bull Run
Presenting July 24, 2018 at TradersExpo :
Inflation? Deflation? Bulletproof Your Portfolio with Options
Current View of a Long in the Tooth Bull Run
Let us hope the current tariff tiff is mostly political bluster for trade negotiations. Barring an all out trade war which would dramatically slow the world economy, the bull run will continue. Small cap stocks will lead, particularly in the tech and bio-tech sectors where the potential for rapid growth is greatest.
Potential gray swans on the horizon are fears that the Fed may raise rates too rapidly, a credit crisis in China, European central banks attempt to reign in the currency explosion at too rapid a pace. There is also worry about Italy’s new government. Along with tariffs and stagnation, Europe has yet to deal with its immigrant problems. In an incident reminiscent of the St.Louis , an immigrant rescue ship was escorted to Spain after being refused landing in Italy and Malta.
My current perspective for the rest of 2018 and into 2019 is for a higher overall market with the small cap stocks leading the way. There will be short term pullbacks, generally news driven, but the overall economy is strong and getting stronger. Investment inflows to the U.S. remain strong as does internal capital investment. The measured pace of Fed rate increases is unlikely to derail this trend.
Even thought the markets appear to be toppy and overbought, I anticipate an explosive bull move in the fourth quarter of 2018, driven by earnings. There will be pull backs of ten percent or more. However, mergers in all sectors are decreasing the number of shares available and forcing prices upward as managers seek to place liquid funds sloshing through the system.
Downward trend of dollar also drives the bull run.
Clouds on the horizon are in the home building sector. Single family home building is down, rental construction is up. There are countervailing trends. Lumber prices are rising, as are home prices caused by a dearth of properties on the market. Pricing and rising mortgage rates are creating a schism between buyers and renters.
For the past several years my growing concern has been the decline in the number of publicly traded companies. This attrition has been caused by mergers and buyouts by private equity firms. Concurrently, the growth in the number of mutual funds and ETFs has continued unabated, though at a more muted rate. These two factors alone guarantee a continued rise in the market until such point that the price earnings multiples become unsustainable to any rational expectations of future growth. Even as prices rise, therein lies the ultimate scenario for a major price collapse in the markets. At some point in the future, perhaps not until 2020-2021, the market will start to stutter. Perhaps panicked by an exogenous news event, an algorithmic cascade will occur, quickly driving prices into bear market territory. The effect on the economy, particularly pension and retirement accounts will be ugly.
Consider protective strategies even as you take advantage of what is likely to be an explosive top.
Michael14Steinberg June 17th, 2018
Posted In: Uncategorized
Tags: Bull Run
More Upside Ahead
Hold positions. Add protective stop losses.
In my last post, I suggested protective measures. Several days later there was a 1600 point intra day drop in the Dow followed by a partial recovery that day. As I said in that post, it is not yet time to buy puts and that remains my current belief. The drop did give us the opportunity to sell a number of puts for premium. The Dow and the market in general has recovered from it’s swoon, but it is a sobering example of what to expect when a real bear market begins.
High speed algorithmic trading is now driving the market. It is virtually inevitable that at some point a cascade effect will drive the market lower. This will set off selling to met margin calls which will drive the market even lower. Whatever can be sold to raise cash to cover will be sold. His will include gold and quite possibly Bitcoin holdings.
I mentioned OLED in my last post, anticipating a further decline to 132. Monday it hit an intra day low of 127.50, exceeding expectations and marking an excellent entry point. We are currently positioned with an Iron Condor utilizing the 120 and 125 puts and the 140 and 145 calls for March.
On the watch list: Ichor (ICHR) and Gulfport Resources (GPOR) are nearing entry buy points.
While all the same gray swans remain the same, the markets are adjusting to the expectation of at least three-quarter point interest rate hikes by the Fed. Tax reform stimulus and the repatriation of foreign profits are fueling expansion. Not yet factored in are savings from reduced demands on social service programs as the economy expands. Despite hiccups the market bias remains to the upside.
As the Fed moves towards a more normalized policy, classical money expansion is slowly returning. The ripple effect is back in place, though skewed by the reduction in small business lending. The consolidation of banking power in the major six and the loss of thousands of small banks caused by Dodd-Frank has slowed small business development, yet the economy continues to grow. The markets are slowly turning from easy money as a driver and looking towards corporate profits which continue to rise.
Bank stocks should continue to thrive. Special attention should be given to augmented reality stocks.
Michael14Steinberg February 27th, 2018
Posted In: Uncategorized