The party continued on a run that is starting to feel a little bubbly to me. Valuations are not outrageous but it cannot be healthy when the market just continues to go up, especially when the main reason is that the markets are relying on continued printing of money by the Fed and economic news is mediocre at best. The market has backed off here and there when there was even a hint of Fed slowly taking away the punch bowl, but now that won’t even slow down the market, as market guru David Tepper gave the go-ahead yesterday that a slow Fed-tapering would not be bearish. Tepper said “if we don’t taper back, we’re gonna get into this hyper-drive market. It’s a backwards argument. To keep the markets going up at a steady pace the Fed has to taper back.” The market translation, at least for right now, is this – the market will now go up if the Fed continues to print, and the market will go up if the Fed begins to taper!
Mark Travis of Intrepid Capital Management talked about the ridiculous run up in Tesla and the good valuation in depressed Pan American Silver (PAAS) today on Talking Stock. Coincidentally, I added to my position in PAAS (sometimes it hurts to be a value investor)!
On the positive side we have added to several positions in our trading accounts in the last couple of days, including CSCO the other day, which is up over 8% in after-hours trading on positive earnings.
Another warning sign that the Fed’s printing machine might be leading to dangerous conditions and unintended consequences, junk bond yields have hit an all time low.
The SPY busted through the 159.75 level into new ground with a strong advance on Friday, closing at 161.37. The only negative would be that the SPY closed just under the midpoint of the day.
Many stocks are at fair value or overvalued at this point. A couple that we think are undervalued for the long term are NOV and CAT. We have positions in both. Both stocks are out of favor at this time so there could be more downside.
A friend asked me today what a forward contract is. Here is a brief summary:
A “forward contract” is a private agreement between a buyer and a seller that calls for the delivery of an asset at a future point in time with a price agreed upon today. A futures contract is the same as a forward contract but it is traded on an organized exchange with standardized terms.
To put it in simple terms, ordering pizza to be delivered is a forward contract. The customer and the restaurant agree that the customer will buy the pizza at a specific price at a future point in time (“around 30 minutes”). When the pizza arrives, the customers has to accept delivery of and pay for the pizza, even if the customer found an advertisement for a cheaper pizza elsewhere.
In a forward contract, both parties are legally committed and cannot get out of the commitment. However, one party can enter into a new, offsetting forward contract to unload their end of the commitment. As an example, if the buyer of the pizza decided they want to go out for dinner instead, they can establish a forward contract with their neighbor. When the pizza arrives, they pay for it, accept delivery, then deliver the pizza to the neighbor and get paid from him (or her). Maybe if they are good negotiator they could even have made an extra dollar or two!
In a forward contract, each party is subject to the default of the other. So in the pizza example, when the pizza arrives and there is no one there to pay for the pizza, the buyer has defaulted.
If the contract was on a futures exchange there would probably be something called a daily settlement. For each contract there is an initial margin, which is the amount that must be deposited on the day the transaction is opened and a maintenance margin. The maintenance margin must be maintained every day thereafter.
Those are the basics.
(parts of the pizza example were summarized from “An Introduction to Derivatives and Risk Management” by Don M. Chance and Robert Brooks)
The SPY closed at a new high, barely edging the high from April 30 and April 11. This is now the third attempt to crack the 159.75 level. The market has bounced off the 154 level three times in the last few weeks and refuses to break down. The market closed right at the high. Tomorrow will be interesting.
Margin Debt Nears Record
Check out Dave Wilson’s chart of the day. Margin debt in March was at the second highest level ever, checking in a $379.5 billion, just shy of the record set in July of 2007 when it hit $381.4 billion. July 2007 was a few months before the market tanked.
REGI explodes to upside
Renewable Energy Group (REGI), a stock that we previously owned and liked in the low $5s, topped the $11 mark today. We exited our position around $7, which was good for a very nice gain, but should have held it, as evidenced by the recent price action.