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Introducing Some Ideas for 2020

Commodities Are On Our Radar

The best and brightest just gave up on commodities.

“Merrill Lynch got OUT of the commodities business in 1998 because they weren’t making any money

The pencil pushers at investment bank Merrill Lynch had done the math – they knew that the main commodity index had lost half its value between 1980 and 1998 – and they threw in the towel.

What happened next?

The Rogers International Commodity Index soared from a starting value of 1,000 in 1998 to a peak near 6,000 a decade later.

The best and brightest are getting out of commodities once again. And that means we could be near the start of a major move higher.

Now, the venerable investment bank Goldman Sachs is giving up on commodities.

Commodity prices have lost two-thirds of their value since their 2008 peak. So the pencil pushers at Goldman have decided there’s no money to be made in the commodities business. They’re throwing in the towel.

The Wall Street Journal broke the story last month. And the explanation from Goldman on closing its commodity businesses was beautifully simple…

The business uses too much capital for too little profit.

It’s a major shift from one of the world’s most powerful investment banks.

This landmark decision tells us exactly what the market sentiment is toward commodities today. It’s terrible. It would have to be, for Goldman to close down its commodity business. Goldman has given up on commodities. And it feels like nearly every other investor has, too.

The perception is that commodities are dead…It means we’re on the edge of a turning point…This is darn near the best signal we can get that a commodity boom is about to begin.

We believe that the commodities opportunity is huge.

This move by Goldman tells us how investors really feel. And this time, it reveals an entire industry is about to shift.

That’s because this is a “real money” indicator. It’s a business decision made by the pencil pushers at Goldman Sachs who are watching Goldman’s bottom line… and reining in the institutional investors. These kind of business decisions aren’t made lightly – they really mean something.

Make no mistake… This is setting up a huge opportunity to make money.

When Merrill Lynch closed down its commodity business in the late ’90s after years of underperformance, the company almost perfectly pegged the bottom in commodities. Anyone who invested when Merrill pulled out made incredible profits.

And now, Goldman Sachs is doing the same thing. And that makes a long-term commodity bull market, starting now, a real possibility. It’s the kind of setup contrarian investors dream about. And it’s here now!

Commodity Research Bureau Index (CRB)

Thomson Reuters/CoreCommodity CRB Index 1993–2012

See current interactive chart thru 5/03/2019

https://www.bloomberg.com/quote/CRY:IND >>> paste to URL

Click Full Chart / select 5 year

OPEN

182.08

1 YEAR RETURN

-10.06%

52 WEEK RANGE

168.21-206.95

**CRB Index increased 14.67 or 8.34% since the beginning of 2019, according to trading on a contract for difference (CFD) that tracks the benchmark market for this commodity. Historically, CRB Commodity Index reached an all time high of 370.73 in April of 2011 and a record low of 155.53 in February of 2016.

Investment Opportunities in Latin America

We currently have nothing direct but we have indirect, and what does that mean? We actually do have a Chilean Investment  … I guess it is direct, we have a Chilean fish farm, it’s a salmon farming company, it’s called Salmones Comanchaca, We admit it took us a little while. We before we could just say it was done smoothly. But, we own it north of 5% of the company.

But, it’s listed on the Norwegian Stock Exchange, that’s why we kind of said it’s indirect, but it’s actually a salmon farmer in Chile that’s controlled by a family and here in the northeast in the United States they provide a shop, for example, with their salmon.

So that’s really our only direct asset in that region. But it’s a region that has a number of families, and main owners of companies, it’s gone through a lot of stress and strain. And, you know, it’s a region that has had sort of booms and busts over long periods of time. And is also, and depending on which countries you’re in, a lot of national resources. We have historically avoided all kind of resource type of investments, commodity businesses. We like to only look at them when it’s just absolute sheer carnage and devastation, which is what, drove us to shipping companies’ years ago.

How to Define Risk and How to Manage It

Well, look, in terms of risk, we think about permanent loss of capital, what will cause that? How much risk are we taking for the returns that we have or gains that we are trying to achieve? How do we manage the risk that we’re taking?

Well, we’re trying to buy stocks that we think are substantially discounted at the valuations when we start. We’re trying to build in, you know, people like to whip around the words, you know, margin of safety so we’ll join the club.

But, we want a substantial margin of safety; we want a real … not just a cushion but a series of cushions. And as we’ve said before, this whole concept of having all these catalysts or assets that are maybe for sale, non-core and so forth, to help cushion the opportunity or the path to getting the opportunity to work, and really just focusing on what can go wrong.

If you look at our write-ups, when we write things up internally over the last few years, the risk section for each and every investment has gotten bigger and bigger and bigger, not because we’re taking bigger risks, but because we’re focusing more and more on realizing that there’s layers of risk that maybe we didn’t think about in the past.

Do we have a company that’s selling directly to China? Sure. And, we have a company that’s selling to … a French company which in turn sells to a German company that’s selling to China and we had to evaluate whether there are indirect risk exposures and so forth.

One Trick to Buying IPOs Safely

We have a client who bought shares of Facebook (Nasdaq: FB) on the day of its initial public offering (IPO).

The guy’s a boat captain. At the time, he admitted to knowing very little about the stock market, or even how Facebook would turn a profit. He just really liked Facebook — the site — and wanted to own a piece of what he thought could become an iconic company.

In the long run he was right. But it was a painful start.

Shares of Facebook debuted on May 18, 2012, for $42.05. But by early September they were trading for under $18 — down nearly 60% in less than four months!

A lot of IPOs go that way.  There’s excitement ahead of the offering; people chomp at the bit to buy it as soon as they’re able. Then the stock slumps, sometimes drastically. We saw it happen with the recent Lyft (Nasdaq: LYFT) offering. Shares opened at $87.24 on March 29 — just a month ago — and they’ve already fallen under $55.

We bet a lot of folks have already bought into the Lyft IPO for the same reasons our client friend bought Facebook’s on Day 1. They buy into the company’s story, as told by its founders, private equity investors, and the investment bankers who bring it to public markets. All of whom, keep in mind, have tremendous financial incentives to fetch the highest stock price possible.

Our client friend is also the type of guy who has to have every new thing as soon as it’s out. And we wouldn’t be surprised if a lot of IPO buyers are that same way, whether they’d admit it or can even recognize it.

The thing is, you can wait before buying an IPO…No one says you have to buy in on Day 1.

Implementing an IPO “waiting period” can go a long way toward helping you avoid the worst of Wall Street’s IPO duds. But what does that mean?

It means resolving to not by an IPO until after a specified amount of time has passed — for instance, six months.

And then, when six months is up, you still don’t have to buy the stock right away just because you’ve held off during the waiting period. You can also resolve to not buy a recent IPO unless it has positively proven itself — which means, to trend-followers like us, you don’t buy the stock unless it’s already trending higher.

Long-time readers should know the benefits of only buying things that are already trending higher: a greater probability of success and reduced risk.

That’s true of any investment vehicle, not just IPOs. But it works uniquely well for IPOs, as any determination of trend can only be made after a minimum length of time.

Let’s say your trend rule is: I will only buy stocks if the price today is higher than the price six months ago.

It will then be impossible for you to buy the IPO stock before six months has passed, simply because, before then, it hasn’t traded long enough to as to allow a determination of its trend, according to your guidelines.

Only after six months can you answer the question: Is this stock already trending higher?

Of course, this approach could mean you miss out on some of the early gains made by IPOs that trade higher initially and never look back. But those are potential missed opportunities I think you should be willing to forgo because many IPOs — if not most of them — are debuted at untested and inflated prices.

Why do you think people say IPO stands for “it’s probably overpriced”?

A trend-following rule can absolutely help you avoid the damage done by an IPO that deflates right out of the gate, and potentially even get you into the stock at a lower price.

That was the case with my friend’s Facebook purchase. He bought on May 18, 2012, for around $42 a share and suffered through a 60% drawdown in the first several months. Had he waited for Facebook’s six-month trend to turn positive first, he could have bought in at $28 a share in December.

He wouldn’t have missed out on the social media icon’s epic success. And he could have avoided overpaying for it, along with those initial sleepless nights!

Whether you’re now eyeing Lyft’s IPO, or any other for that matter, we strongly recommend implementing a waiting period and trend rule. Let the stock prove itself capable of establishing a bullish trend before making a move. You’ll increase your odds of success and reduce your risk.

How to Lose It All in the Market

The stock market has a way of luring speculators into a false sense of security. There’s little volatility. Stocks rise seemingly every day. The economy is humming along. The Federal Reserve is accommodative.

There’s only one way to go: Up!

Then something happens… It could be anything that causes the market to go the other way.

And the market picks our pockets.

Happens all the time! Are we looking in the wrong direction right now, only to have our wallet lifted out of our pants pocket? There are some interesting statistics out there that suggest this might be the case

Market veteran Vincent Deluard, a macro analyst at INTL FCStone, points out in a report called A Bull Market for Losers that:

  • more than one in three companies in the Russell 2000 Index posted negative earnings last quarter;
  • those 671 companies lost a combined $69 billion over the past 12 months, compared with positive earnings of $33 billion for the index; and
  • the market capitalization of Russell 2000 companies that have negative earnings accounts for a record 27% of the index.

The con job is in the details. The price-to-earnings (P/E) ratio of the Russell 2000 is listed at about 16.5 times earnings. But that figure excludes these money-losers. According to Deluard, factoring these “basket of deplorable” stocks into the equation puts the true Russell 2000 P/E at…75 times!

Not good. This will end badly. The laws of economics will never be repealed.

In addition to these troubling trends in money-losing small-caps, there’s also the initial public offering (IPO) market flashing warning signs.

Lyft (Nasdaq: LYFT) might be a great way to grab a ride home after a few too many beers at the local pub. But it’s been a terrible investment. LYFT has been imploding since its first day of trading.

Zoom (Nasdaq: ZM), which provides an online video platform, surged 72% on its initial day of trading. Not only did insiders leave a lot money on the table, but now the market cap is huge, at over $17 billion. That also leaves little room for investors to truly reap the rewards of being a shareholder. The company will have to grow into its nosebleed valuation even as it hovers around breakeven.

Pinterest (NYSE: PINS) also popped on its IPO. The company continues to lose money despite revenues exploding in the last couple of years.

There’s a name for these IPO plays. They’re called “unicorns” because their pre-IPO valuations exceeded a billion dollars. Most of them lose gobs of money. Investors don’t seem to care.

We’ve seen this movie before with Internet stocks. It’s a horror film. It ends badly.

Be prepared to have your pocket picked.

But, you can buy the following listed stocks now and hold them for the long term:

Wells Fargo & Co. (NYSE: WFC)

CVS Health Corp (NYSE: CVS)

General Electric (NYSE: GE

Qualcomm (NASDAQ: QCOM)

Constellation Brands (NYSE: STZ) / Canopy Growth (TO: WEED)

We think this group will make you a lot of money over the next 10 years!

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