Drop That Chicken! (BRFS Short)

  • Brazil’s economic and political climate are toxic for its companies.
  • BRF is closely tied to Brazil’s economy. Where Brazil goes, so does BRF.
  • BRF’s margins are being attacked on all sides which has in turn hurt its bottom line.
Brazil is a mess. With a toxic economic and political environment, it is not a good place to put your money. But that doesn’t mean you can’t profit from the those who do invest there.

Brazil is currently facing its worst financial crisis since the Great Depression. As seen in the graph below, GDP shrunk 4.5% in the 3rd quarter from a year earlier. This is the 6th consecutive quarterly contraction. It’s also the lowest number recorded since Brazil started using their new GDP system in 1996.  Read more

This Bull Market Is Over… Done… Dead: 3 Indicators Pointing Towards Major Trouble Ahead

We watch a whole host of macro indicators; they give us a peek under the hood of markets and the global economy. The thing about these indicators is that they are slow moving — they’re not something that need to be checked every day, nor every week.

98% of the time, these indicators point to smooth sailing ahead and signal we should stay on the bull, going long risk-assets.

The other 2%, these indicators start turning over and begin flashing warning signs. It generally starts with just a few, and we know not to be alarmed, only that we need to keep an eye on the exit.

And then, generally every 5-7 years, our indicators (all of them) start screaming “Danger..Danger…Danger”. When this happens, we know it’s time to start tactically managing our longs and to loosen the leash on our inner-bear – and begin looking for opportunities to plunge to the short side. Read more

Extremely Important News Just Came Out Of China – Here’s How To Play It

Important market news came out this weekend, and surprisingly (or perhaps not so) it has received little notice. I’m talking about the PBoC’s statement released Friday, signaling that they are looking to break the peg to the dollar and rebalance against a currency basket. Here’s the news, via The Financial Times:

China has paved the way for a further weakening of its currency by announcing changes in how it measures the renminbi’s value.

As markets gear up for next week’s Federal Reserve meeting, the People’s Bank of China signaled it would measure the level of the renminbi (or yuan) against a basket of currencies rather than just the US dollar.

The move, announced on Friday, has raised investors’ alarm at the prospect of a new currency war – just as the US prepares to raise interest rates.

Readers who follow us at Macro Ops knew that this change was coming. Read more

Par Pacific’s Recent Share Offering And Price Decline Doesn’t Make It Any Less Valuable

It’s been a wild few weeks for Par Pacific Holdings (PARR).

After a major move to the upside caused by strong Q3 results, PARR plummeted almost 14% on November 23rd on news of a brand new share offering.

PARR announced that it was selling 3.4M common shares at $22/share in a registered direct offering. At $22, these shares were priced at over a 20% discount to the stock’s closing price a day before. PARR was able to raise approximately $73.74 million with this offering.

The market’s immediate reaction to this news was to sell-off. PARR has since declined further and is now hovering around $22.

We believe the reaction to the share offering was overdone and that the price decline is providing a great buying opportunity at a discounted rate. Read more

Is Oil Black Gold Or Fool’s Gold? We Think It’s The Latter, Here’s Why

 

The following excerpt and image below are from Carl Richards in a New York Times Blog post:

The recency bias is pretty simple. Because it’s easier, we’re inclined to use our recent experience as the baseline for what will happen in the future. In many situations, this bias works just fine, but when it comes to investing and money it can cause problems.

When we’re watching a bull market run along, it’s understandable that people forget about the cycles where it didn’t. As far as recent memory tells us, the market should keep going up, so we keep buying, and then it doesn’t. And unless we’ve prepared for that moment, we’re shocked and wondered how we missed the bubble.

We wanted to start this article on oil with a brief mention of recency bias for the following reason: This cognitive bias has blinded many investors from properly understanding the true fundamental supply and demand dynamics at work in crude. It is human tendency to overweight the importance of recent data relative to past information. Most of the time this is the right thing to do. But occasionally in investing, there are large paradigm shifts that vastly differ from recent experiences. In these instances, the investor would benefit from a more detailed study of historical data in order to better grasp possibilities. There is large alpha in these secular market shifts for those who stay on top of them. (Keep reading….)

 

The 3 Reasons Druckenmiller is Bullish On Amazon and Why You Should Be Too

Legendary hedge fund manager Stanley Druckenmiller had a lot to say at the recent New York Times Dealbook conference.

When The Druck speaks, you should listen.

One of his more interesting segments involved him proclaiming his love for Amazon. But these aren’t just words, Druck tends to put his money where his mouth is. According to Business Insider, Druckenmiller’s family office Duquesne Capital bought a large amount of Amazon shares during the third quarter. Druckenmiller is bullish on Amazon for 3 reasons – their focus on the long term, their profitable cloud-computing business AWS, and their ability to eventually flip a switch to drastically increase profits. Read more

The Fed Is Hiking Rates In December And What That Means For Markets

The all important job numbers came out Friday. US employers hired at their strongest clip so far this year and more importantly wage growth ticked up.

  • Non-farm payrolls rose a seasonally adjusted 271,000 in the month of October
  • Average hourly earnings of private-sector workers rose 9 cents to $25.20
  • This puts hourly earnings up 2.5% year over year (a substantial increase in wage growth over the previous 6 years)
  • The unemployment rate fell to 5.0% (its lowest reading since April 2008)

The strong jobs print helps solidify the likelihood of seeing the Fed move rates higher in December, Morgan Stanley’s Ted Wieseman notes (via WSJ):

“Strong report, reversing the weakness seen in the prior two months. With [Chairwoman] Janet Yellen having suggested a low bar for moving in her testimony Wednesday, this should leave little doubt the Fed is going to hike rates in December barring some sort of unexpected shock in the next month.”

The market is now pricing in a 72% likelihood that the Fed will hike next month.  Read more

IBM: The Poster Child Of Capital Misallocation

IBM has quickly become the poster child of the popular “buybacks-trump-everything” financial engineering phenomenon. This will not end well for its stock price.

Big Blue used to lead American innovation, but not anymore. Instead, it now epitomizes everything wrong with the greedy short-term thinking that plagues c-suite ideology. Read more

Facebook Ready to Reach the Moon

  • Winner take all tech is manifesting itself in the market
  • Facebook is ripping to new highs on a great Q3 earnings report
  • Emphasis on long term growth instead of short term earnings makes Facebook the most loved stock on Wall Street

Read more

Foundation Podcast 10/25

Show Notes

Show Overview

  • Review of:
    • The Biotech Sector
    • Cloud Computing Tech Names
    • Europe and Japan
    • Oil
  • Plus a discussion on why tips and picks from newsletters aren’t enough to be successful in markets  

Biotech Sector

  • Price action signaled the top – Head and Shoulders pattern
  • Macro Outlook – end of current business cycle with rates likely to tighten
  • Biotech was an overvalued sector the last few years – too much hype, yet not enough real results for many of these companies
    • Theranos – a blood testing company valued at over $9 billion that has yet to prove that its technology really works
    • Valeant – recent fraud allegations
  • Low interest rate environments lead to capital misallocation everywhere, not just in biotech
    • Sakti3 – a supposedly “revolutionary” battery company that could not produce any results  
  • The catalyst for the biotech drop was attributed to Hillary Clinton’s statements on drug prices, but in reality, those statements were not the real key to the drop. The real key was the underlying conditions that were already very apparent in the biotech sector. Any catalyst would have done the trick to send biotechs lower.  

Cloud Computing Tech Names

  • “Winner Take All” mentality – tech stocks are the last real area of growth due to their cloud computing presence
  • These stocks are building a giant moat in the cloud industry that will ensure protected profits for years to come
  • The macro equity pictures isn’t great, but the “winner take all” narrative is taking over and launching these stocks to new highs
  • Going long these tech stocks is a good hedge against any shorts you may have on in the market
  • Volatility is greatest at turning points, which currently makes it a difficult time to invest in the equity markets  

Japan

  • Breakout from triangle
  • Japan’s economy is stuck in a deflationary malaise due to unending government support for dying companies, a tight labor market, and terrible demographics
  • Is sex drive correlated to economic performance?  
  • Japan also suffers from extreme debt levels, and the only way they can fix that is by destroying their currency
  • The Currency Wars will also affect Japan’s decision to devalue their currency

Euro

  • Breakout of giant triangle
  • The catalyst for the move was Draghi’s dovishness in the last ECB meeting
  • Fundamentally, Europe is a mess. Their “union” will never work. Trying to manage competing fiscal policies under one monetary policy is a recipe for disaster.
  • There is a rise of anti-europe and anti-immigration parties all while the refugee crisis rages on
  • Europe will keep devaluing their currency to fight off inflation

Oil

  • Oil price is sitting at the lows and not recovering
  • Many oil companies have had to really tighten their belts and cut all expenses
  • Years of capital investment with the thinking that oil would stay at $100 a barrel is now making the pain for these companies much worse as they are forced to readjust to the new normal
  • The top 40 frackers in the U.S. use around 86% of their cash flows are going to service their debt costs. This is obviously unsustainable

Newsletter Picks Are Not Enough

  • Trying to profit off random newsletter picks does not work because there is no process behind this method
  • Process is KEY – it’s hard, but it’s what works