Palpara Merchants

Biggest beneficiary off this deal: Michael Dell. You’ve kept up with Michael Dell right? No, well me neither, but sort of…

I’ve liked him- most guys obsess over guys like Cuban- but Dell is a worthy USA business guy to follow.

Turns out he started MSD Capital (no doubt the initials “MSD” are his) which, from 2013- its start, until now, has done mostly charitable stuff under the radar, owns 7% of $NGHC. So Dell is getting a nice premium for the insurance company his money firm has owned for 7 years.

Funny, this is how Buffett started out: by making his textile manufacturer (after which the company is named) use cash flow to buy an insurance company he believed was great…

Is Dell‘s company starting a similar streak???

Who knows.

Read Buffett’s shareholder letters. They are amazing…

Use a Dell. It will get stolen from you in college or last half as long as it takes Apple to ship a game changer- which ever comes first.

This week I see two signals: one in fuels cells and the other in gold miners.

Fuel cell stocks are showing clean break outs, but I see no reason why in their earnings. $BLDP was the first to break out when it traded at $10.75 in early June. Yesterday $PLUG followed in line. There is evidence of institutional buying in the volume but since the earnings show no improvement, I am keeping stops tight.

The other signal is in the gold miners. After a false buy signal from my proprietary indicator last week (which was immediately followed buy a sell signal the very next day) yesterday showed the first indication that a resumption of the uptrend is coming soon. It can come in fits so I bought a quarter position. Follow on signals will force me in to a full position as they come.

Trades need to be analyzed at the end of every month. A trade distribution graph can revel specific aspects of your trading in need of improvement:

“History doesn’t repeat, but it often rhymes.” – Mark Twain

Summary:

-Fear of stocks crashing due to corona-virus-induced economic shutdown should be balanced by fear of stocks hyper-inflating; holders of cash lose wealth.

-The forces that caused the 2008 crash are still present today; we treated the financial symptoms but not the disease.

-The petrodollar system that has been the world-order since the end of World War II is in the beginning stages of restructuring.

The severity of the virus itself is not something on which I am qualified to opine. However, the financial effects of the economic shut down caused by the virus are my focus, and here I attempt to explain how the thing we call “money” changes in a post-corona-virus-shutdown world.

First, the approximate cause of the 2008 global financial crisis was a seizing of what is called the “wholesale funding markets.” Think of that as the raw materials that go into the financial system to produce the end product: a loan. The wholesale funding market is how banks get the money to loan to you for a mortgage or a new car or to start a business. The wholesale funding market is how cash comes out of the ATM, how large corporations like General Electric, IBM, AT&T, Google, etc. pay their employees every 2 weeks. The cause of that seizing up is complex, but we, as a society, treated the symptoms of the disease by allowing our politicians to bail out the banks and permitting the Federal Reserve to implement extraordinary monetary policy by creating reserves on the banks’ balance sheets (known as quantitative-easing or “QE”). These actions were a “triage” to save a critical patient, and they have stabilized the patient for a decade.

So what I believe is happening to our economy is beginning of the end of the petrodollar system. Petrodollar is a term used to mean the selling of OPEC oil in US dollars. After World War II, the civilized world needed to rebuild, but the entire capital base of Europe was destroyed. They didn’t have any factories with which to build the bulldozers to clear the rubble of destroyed buildings from their cities. So the US just printed it and gave it to them. Then they could use those US dollars to buy Caterpillar bulldozers from us to clear the rubble, buy steel from US Steel to rebuild, etc. The world also needed crude oil. Saudi Arabia was signed on the Marshall Plan to rebuild Europe to provide the energy with which the would could rebuild. Saudi agreed to accept US dollars for their crude oil- thus the term “petrodollar.” By selling crude to the world and receiving US dollars, Saudi was taking in more US dollars than they could ever spend- there simply wasn’t enough production in the world to buy for the relatively small population of Saudi Arabia. So the Saudis stockpiled their US dollars and the US Treasury sold the Saudis US bonds that promised to grow the Saudi’s cash faster than the value of their oil in the ground- thus giving them incentive to produce oil rather than leave it in the ground. This is the beginning of the US debt we are now dealing with. This debt is the cause of the financial disease.

The cure for this disease, in my opinion, is to cancel the debt. A debt jubilee is an event that has happened repeatedly throughout the history of civilization- since the creation of money in ancient Babylon. The last debt jubilee started before World War I and completed with the close of World War II. All the national debt was wiped out over this time and a new system of debt was created with the petrodollar. I believe we are now in the process of wiping out this debt system. If this is true, a probable outcome is the hyper-inflation of US Stocks. The reason is that cash (US dollars) will be of unknown purchasing power after the debt is inflated away (note the $2 trillion dollar spending bill about to become law today). This does not mean that I think stocks will go straight up. I do think that in the end of this process, a likely outcome is that stocks are multiples higher than what they are today. So the S&P 500 is at roughly $2,500 as of today, March 27, 2020. So maybe this corona-virus resolution ends with the S&P 500 at $10,000 in a couple years, maybe $50,000 in 5 years… Note that we won’t be richer as a society- we won’t be able to purchase 5 or 20 times more stuff, but the debt will still be in nominal dollars, so it will be a much more manageable number relative to the amount of dollars in existence. This is hyper inflation of assets. It doesn’t mean that the cost of our real world expenditures hyper-inflates, just asset prices; after all, debt is just a paper liability, so wouldn’t a hyper-inflation of paper assets make sense to balance the paper liability?

In conclusion, the hyper-inflation of paper assets is what I believe has been driving some degree of the stock market rally since 2009. The market has been anticipating the end of the petrodollar system for 10 years. I am worried that the economic shutdown of the entire world could make stocks revalue much lower than the current S&P 500 price of $2,500. However, I am also aware of the possibility that stocks may revalue much, much higher to compensate for decline in the value of the US dollar. How does one invest in a binary situation like this? All cash to avoid the stock market crash and you risk hyper-inflation making your cash worth much less. All in the market and you risk an economic shut down making your stocks worth much less. There is a fine line that navigates between these two disaster scenarios, and I don’t believe it is a traditional 60/40 portfolio…

What should we own to preserve wealth we have, and what should we own to create wealth? These are two questions that have the same answer. It is an elegant answer, and it is a time-tested answer to similar problems in the past. The answer is obvious to those who enjoy studying the history of money (remember, history doesn’t repeat, but it often rhymes)… Can you guess the answer?

Here are some clues:

-Executive Order 6102, 1933.

-Bretton Woods, 1944.

-President Nixon, 1971.

-Plaza Accord, 1985.

-Louvre Accord, 1987.

Can you guess? 🙂

A video on how to approach a stock that has crashed- from chart analysis, to a basic fundamental analysis, to a risk management analysis.

All three types of analysis are combined to give us a great risk/reward trade that can turn into a wonderful investment if things go right.

Stocks are still about 12% higher than my ideal buy price. Institutions that manage big money are likely still accumulating stocks for 2020, but being smaller investors we have to be selective in our criteria for value. We also have to guard against a 2008 type system break down. I’ve got a plan that works for both scenarios.

Here is the video on youtube.

Here is something to build into that will counter the cyclical trades from the last post.

$BGS:

BGSdly

This trade give us Rvalue of 11.5 if you could hold this long enough to get to $50.

The more plausible price target would be the mid range of $35 which lowers our Rvalue to 6.25 which is still a very good risk of every $1 to reward $6.25 for position sizing calculations. For this trade, I have a 0.6% position size limit. So I would have to have a total loss of capital in a trade 167 times in a row to go broke…

So these draconian risk controls are because it is difficult to think how bad it would be if the markets were just closed for a long time, in which case the effective value of your capital is $0 if you rely on that capital to be there. The stock market is not like the physical means of production (the capital in capitalism) from which common stocks derive there value. So for me, this position sizing makes sense, to put me into the best position to hold out for something close to my ideal Rvalue, so I can hope to get the income I need.

I like it cause it means I am different- many would just hold what they have- exhibit risk seeking behavior. This way I can be risk averse and cool headed, in a hip way. Maybe I’ll be wrong…

The chemical stocks are deep cyclicals- they can only trend higher in the later part of an economic cycle. I think we are there. These three stocks’ price action is telling me this. So here are three trades:

$PPG is a leader in the sector. Here we can see $PPG is breaking out of a multi-year high base. The low risk trade is to buy here on the breakout, with a stop below the breakout level. Notice $PPG’s price in relation to the orange line- the 175 week moving average. It is above- which is a sign of relative strength.

PPGwkly

Next we will take a look at a smaller company, $SCL that is trailing the big leader. $SCL is just poking its head around $100. A decisive close above par would be a bullish indication that higher prices need to be auctioned to find sellers. Notice the relation to the orange line, the 175 week moving average- again, the price trading above is bullish, but we would like to see the secondary indicators at the bottom of the chart to turn up to confirm our bullish bias.

SCLwkly

Last, we look at a really deep cyclical in the chemical space: $KWR. We can see last time the stock tagged the 175 week moving average, it trended higher a good bit. We are back at the same moving average and $KWR appears to be holding for now. The low risk trade is to buy here and stop out if the stock closes below the 175 week moving average. We would like to see the secondary indicators at the bottom of the chart turn up to be more bullish.

KWRwkly

So here we have three great trades that should do nicely if we are in fact in the late innings of this economic cycle.

If you are familiar with Van Tharp’s Rvalue trading concept, here are the Rvalue figures for these trades if you buy in the green circles, stop out in the red boxes, and sell at the previous high on the chart:

$PPG: 11R trade, so for every $1 you risk, you make $11.

$SCL: 8R trade, so for every $1 you risk, you make $8.

$KWR: 5.5R trade, so for every $1 you risk, you make $5.5.

For a grand total of risking $3 to make $24.5- that’s not bad! But you would likely have to hold until this part of the cycle is over- at least a year from now, maybe longer. So patience is the key to this type of trading concept.

It is hard to see through the narrative propaganda persuading us to believe the economy is great, but if we focus just on economically sensitive stocks we can form an understanding of what id really happening.

The cyclical stocks all appear to be breaking out or close to it. Many transports, industrials, and banks are starting to break out while the utilities and REITs see their long advances start to level off.

This leads me to form a bullish bias as of right now- no matter what is happening with trade wars, repo rates, QE, or elections. It is much easier to just look at major price signals. I see a bullish signal starting to develop with these break outs…

The voice of reason is quiet, practically unheard.

It can’t be heard over the roar of hastily formed, unrigorous opinion.

The reasonable are timid.

The unreasoning are bold.

So logic takes the sidecar while ignorance drives.

And thus, much of civilization’s woes persist unabated…