Francis says...

Is the earth moving in China? Chinese stocks tumbled this week (the Shanghai down 13.9% on the week including last night’s 6.4% decline) and the headlines are talking Bubbles but maybe earthquakes. According to Bloomberg, 25 IPOs were priced in the country this week with more than $1 trillion worth of bids! I note however that an article quoting a Blackrock Chief Strategist is considerably different than the financial institution’s own very large report on the country “Climbing China’s Great Wall of Worry”. While the quote talked bubbles, the big report noted “It is tempting to simply dismiss buying Chinese assets: too much debt, too little growth and too policy-driven. This is a mistake, in our view. One can worry about the economy and rising risks in the long run but be bullish on markets in the short to medium term.” They recommend buying Chinese “H” shares where valuation is more attractive that Chinese “A” shares.

Chinese weakness aside, the bull market is alive and well in the rest of the world. European stocks are up (but now off their highs) as Alexis Tsipras says a deal can get done and special meetings are planned. The Nikkei is close to its cycle high again. And of course, yesterday, the Nasdaq surpassed its intra-day high yesterday (5132.52 versus last night’s close of 5132.949). The S&P 500 is again within spitting distance of its all-time high. And everything is good!

What am I reading this morning? Today’s Globe & Mail has an interesting article on how banks and other institutions have to alter the way they raise funds because there is currently no appetite for the previous issue of choice – rate reset preferred shares. They have plummeted in price as government rates stay low and concerns rise about the floating rate coupon when these preferred shares reset. More interestingly, perhaps, is the fact that even on a reset basis, the running yields at today’s low rates would be in the area of 4%. Add in the benefit of the dividend tax credit, the equivalent fixed income yield would be 5.2%. There are risks of course. These are perpetual preferred shares and rates could go lower (these preferred shares re-set their yield against, usually, a 5-year bond). But rates are historically low and there could be some interesting income oriented opportunities for people doing their homework.

On BNN, we’re talking gas prices (why are they so high?), spin-offs (big banks in the U.S. could be candidates for parts being broken off), BlackBerry (is it set to rise?), IPOs (how much is money raised for companies and how much is exits from Venture Capital and Private Equity), gold (BMO initiated coverage this week with a buy on Goldcorp and Barrick and a strategist told us earlier in the week that resource stocks today are as cheap now as they were at the peak of the technology bubble in 2000), Egyptian Cotton (on Commodities), the telecom pricing in the G7 (how much does your phone service cost?). Oh, and we just might talk a little bit about Greece too.

It is the end of the week. Traders say the weekend trade is setup for dollar bulls – so watch the currency markets. And according to history, the week after quadruple witching tends to be soft. Today, we get the S&P 500, Russell indices and the S&P/TSX rebalancing today. Additions to the TSX include Computer Modelling Group, Enghouse systems, Mitel, Intertain and Seven Generations (out AGF, Canexus, Capstone and RMP Energy). For the S&P 500, according to S&P Capital IQ, the rebalancing will result in an estimated 1% reduction in Apple’s weight while Alexion Pharma could see a more than 10% increase in its weight. 232 issues will see weighting increases while 248 will see declines. The biggest weight reduction will be in telecom while energy, interestingly is estimated to have the largest increase as a sector (although very small).

And it is Father’s Day this weekend – celebrate with your own or someone else’s. Enjoy.

CNN fear/greed index is down to 25...Trouble Trouble A Wall Of Worries

The chase by Frances Horodelski:

Trouble...Trouble, trouble, trouble, trouble; Trouble been doggin' my soul since the day I was born; Worry...Worry, worry, worry, worry; Worry just will not seem to leave my mind alone. – Ray Lamontagne

Here’s what is of interest to me: The CNN fear/greed index is down to 25. The percentage of stocks trading below their 50 day moving average (in the S&P 500) is running at 68%. On the TSX that number is 70%. There is a lot of damage done. It might get a little tenser. Greece talks are a mess. Tsipris is going to Russia on Friday (and speaking in Parliament today saying any deal should not prolong uncertainty but that the IMF has ‘criminal” responsibility). Everyone is entrenched (although the majority of Greeks are said to want to stay in the union). Who will blink? Germany? They may have the most to lose as a revival of the Deutschemark would be lousy for trade. We have quadruple witching on Friday and the quarterly S&P 500 and Russell 3000 rebalancing also. Before that we have Dr. Yellen and her gang with the monetary statement and press conference. Lots of trouble and worry to get through before – be careful and nimble but there are many opportunities to zig when the market zags.

Meanwhile in Toronto, the birds are being fed. PrairieSky is selling 5.76 million shares at $31.25/share while Goldcorp is exiting its position in Tahoe Resources, selling its entire 25.6% stake at $17.20 (versus THO’s close yesterday at $18.47).

In China, where there are 25 IPOs pending, stocks started and are continuing the week in negative territory. Interestingly, while the Shenzhen index has outrageous valuations (some stocks trading at 500x plus), the Shanghai index trades at a more reasonable 19x (versus the S&P’s 17.5x). Many stocks in China are cheaper than the most expensive U.S. names. For example, Under Armour. It was announced yesterday that to protect the founder’s control, the company is doing a stock split issuing non-voting C shares which will be used for acquisitions and employee compensation. UA trades at 84x forecasted earnings (with a p/e to growth ratio of more than 3x). Jim Grant from the Grant Interest Rate Observer noted that Michael Kors traded with a similar p/e a few years ago. Today, KORS trades at 10x. Other expensive stocks using 2015 forecasted earnigns and their PEG ratios include Netflex (203x, 7.3x), Amazon (95x, 2.6x), Salesforce.com (93.5x, 4x), Autodesk (54x, 3.3x). Under Armour’s 2015 forecasted earnings are 67x.

What about gold? I mentioned yesterday that often times the chump, or dud, or sector in the cellar for three years or more often becomes the champ, stud or stellar performer in the next three years. Gold has been in a slump since 2011’s peak with bullion down 38% and the XGD (gold stock ETF) is down 66%. Is there an opportunity here? We’ll be speaking with CanaccordGenuity’s strategist about his new overweight gold position.

In the news today we have executives from SunLife and Bentall Kennedy on BNN this morning to discuss the acquisition by the former of the latter bringing SunLife’s real estate assets under management to $97 billion. We have economic statistics to review including confidence numbers across Europe which slumped (German expectations index dropped from 31.5 from 41.9). In the U.S., housing and building permit data. Toyota is buying back 600 billion yen (about $4.5 billion) worth of stock to reduce the impact of dilution. FYI – some of the smartest people I read are very bullish on Japan. This is NOT a mainstream view. Something worth considering. Finally, we’ll talk about Alberta and the implications of rising taxes in that province and waiting for royalty changes. We’ll also look into The Gap and its announced intentions to close 175 stores.

Today’s feature on BNN will be three interviews with three CEOs where the street’s rankings are full-on bullish. Bankers Petroleum (14 buys, one hold), Dominion Diamond (nine buys, one hold) and Raging River (17 buys and one hold).

And just by the way, some of the best big cap companies in the U.S. right now are trading close to their 52-week lows – names like Wal-Mart, Johnson & Johnson, American Express and Procter & Gamble. A shopping list for activists?

Rest In Peace Kirk Kerkorian is 97 years old died today (worth $4 billion)

Kirk Kerkorian is 97 years old and worth $4 billion. The one time owner of MGM, and wealthy Las Vegas real estate and casino over ( he also owned the MGM Grand), is not done, however. He still has one more wish. My sources tell me that Kerkorian is funding a secret feature film about the Armenian genocide that took place concurrent with World War I.

The Ottoman Empire, precursor to the country known as Turkey, killed around 1.5 million to people in the effort to destroy Armenia and establish itself. Kerkorian is hoping to produce the Armenian “Schindler’s List” to memorialize the holocaust.

There is already an Oscar nominated director and screenwriter signed to the project. Various actors’ names have come up, and some of that may become clear soon. The movie is described to me by the director– who’s asked me not to reveal his name yet– as a “Reds” or “Dr. Zhivago”, a sweeping World War I romance set against the Armenian genocide.

Kerkorian, who’s always been fascinated with Hollywood, is said to have contributed over $1 billion to Armenian charities and causes over his long life time.

I’ll have some more info on this soon. For now expect the still untitled film to begin shooting this summer in Europe. And the budget should be pretty big, considering there’s one backer. This movie has the potential to be something on a large historic scale, unseen for many years.

And PS,  I am assured that the Kardashians, the most famous Armenian Americans since the great writer William Saroyan, will be not be appearing in the film under any circumstances.

Market Review- Francis Horodelski

The chase by Frances Horodelski:

Today is the day traders have been waiting for – OPEC, Jobs and Greece.

Well, Greece has already been punted down the street with today’s payment deferred and Angela Merkel saying that there is a lot of work to be done. OPEC members, on their way into the closed session, have already tipped their individual hands noting that no change is warranted. We’ll find out officially at 10 am ET.

And jobs, that happens at 8:30 am. The U.S. consensus is 226,000; Canadian economists see 10,000 jobs created in May in this country and an unchanged unemployment rate at 6.8%. Equity markets are quivering, bond yields are rising, oil and gold are weak and the day begins.

I like the simplicity of this comment from BMO Capital Markets on the banks: “The ‘4+4’ formula of 4% earnings growth and 4% dividend yield for a total return of 8% per annum at a 30% discount to the market keeps us positive on the banks.” BMO’s favourites are BNS, CIBC, TD.

I like what I hear from options traders.

Yesterday, we heard from J.J. Kinahan at TD Ameritrade. He noted that one of the biggest trades in the VIX has been put on – long June $18 calls (which expire in two weeks). On his calculation, for the VIX to get to that level would require a 600 point drop in the Dow in two weeks! I’m also seeing that options bulls are putting their bets on WalMart buying July $75s (stock closed yesterday at $74.88) paying $1.40 which will require the stock to be north of $76.40 by the third Friday in July to be profitable. The stock has been a bit of a disaster (down from almost $90 high and down 13.7% year to date). The company’s annual meeting is today. The stock trades at its median P/E multiple, at a discount to the market and carries a 2.64% yield.

I like lists.

Yesterday, Credit Suisse put out its top picks list (included one Canadian name Agrium). Goldman also has a list of the top 12 takeover candidates (Vertex, Med Johnson, Cabot Oil, Agilent, Alkermes, Centene, FireEye, WhiteWave Food, Cablevision, BE Aerospace, Akorn, Targa.)

I like new guests.

Today we have a “quant” who uses a “military style computer that uses parallel processing, genetic algorithms, neutral networks and scalable computing power to analyze” events and probabilities. Join us for what his computers are telling him now (one of his last calls was Rosetta Resources which popped 25% on a takeover offer).

I like big companies that have lagged and look like value including Procter & Gamble (-14% year to date), WalMart (-14%), Johnson & Johnson (-5%) and TransCanada (-9%) – all well off their highs and close to 52-week lows.

I love how companies and advisors push the envelope when they are pricing IPOs.

Last night DavidsTeas priced 5.1 million shares (with an extra 765,000 shares greenshoe) at $19 versus the original $14-$16 range. And one of the old “red flags” for IPOs is flying here (just a little). Insiders are sellers. Of the 5.865M shares, proceeds from only 2.99M are going to the company, the rest are being sold by insiders. This doesn’t mean it won’t go up and be hotter than a pistol when it starts trading on the Nasdaq under the symbol DTEA – but just one of those things I like to monitor. Over the year, we have seen $1 trillion in IPOs and secondary offerings – and if this year’s pace continues, we’re on track to beat last year’s $900 billion record.

I like markets and statistics.

So, today, Australian stocks finished their worst week in three years led lower by banks (if you wanted to re-write the copy story for another time, replacing Australia with Canada would sound equally plausible). Meanwhile the Shenzhen Composite (1700 stocks of which, according to Bill Gross, only five were profitable in the past year) closed at another all-time high last night and is up a cool 3-fold in the past year.

There will be news as the day unfolds – join BNN to keep current. And – enjoy the weekend.