PGM Capital – Blog
27Sep/140

Get Ready for the 2014 – 2015 ‘SHEMITAH’

By Eric Panneflek

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the 'SHEMITAH' 2014-2015, which began on Thursday, September 25, 2014.

WHAT IS SHEMITAH:
Shemitah is a Hebrew word that literally means ‘release’ and refers to a biblical commandment found in Leviticus chapter 25 that calls for a release of the land from the demands of production (lay fallow) for 1 year out of every 7 years. It is intended to be a Sabbatical year of rest.

At the end of that sabbatical year, which falls on Elul 29 on the Hebrew calendar, all financial debts and accounts are Acquitted. The slate is wiped clean, paving the way for a fresh start.

Note:
Elul  is the twelfth month of the Jewish civil year and the sixth month of the ecclesiastical year on the Hebrew calendar. It is a summer month of 29 days. Elul usually occurs in August–September on the Gregorian calendar.

In ancient Israel it was the family farm. In today's, world it is Wall Street.

The current Shemitah started on Thursday September 25, 2014, and continues through September 13, 2015.

LOOKING BACK TO PREVIOUS SHEMITAHS:
Nearly every major U.S. stock market collapse since the early 1900s has happened during a Shemitah year and the six biggest economic crashes of the last 40 years – 1973, 1980, 1987, 1994, 2001 and 2008 all occurred during a Shemitah year.

The 2007 - 2008 Shemitah:
The previous Shemitah year started on September 13th 2007.

Exactly 1 Hebrew calendar month later, the stock market topped out at 1576 on October 11th, 2007, when housing prices started to fall quite clearly in the United States and Europe.

The Shemitah year ended on September 29th, 2008. Two weeks prior to this the US federal government took over the home mortgage government sponsored enterprises Franny Mae and Freddie Mac, and Lehman Bros declared Bankruptcy.

The stock market began a free fall on September 28th, and on October 15, 2008 the Dow and S&P fell respectively over 774 points and 90.17, as can be been from below charts.

The 2000 - 2001 Shemitah:
This Shemitah year started on September 30th 2000 and ended on September 17 2001.

The Nasdaq took the biggest hit on March 20, 2000, when it lost over 10 percent on that day, as most of the stocks that make up that index were internet and technology related stocks, which were caught up in the infamous ‘Dot Com’ Bubble.

At the end of the trading week on September 29th 2000, the Nasdaq closed right at a key supporting trend line at 3672.81 points. The Shemitah year started with the blowing of trumpets on Saturday September 30th.

When the markets opened the next Monday, the Nasdaq Composite confirmed its slide by breaking through key supports. The Bubble collapsed 55% to a low in October 2002, from which the index did not recover from the Shemitah Year break-down point of 3645 till 2013.

Nasdaq Composite 1

The Shemitah year ended with another Feast of Trumpets on September 18th, 2001, exactly 7 days after a terrorist attack upon the United States on September 11th 2001. Since then, a resurgence of war and violence has spread along with the curtailing of civil liberties around the globe.

The 1993 - 1994 Shemitah:
This Shemitah year started on September 16 1993 and lasted until September 5, 1994.

From October 1993 to November 1994 US 10-year yields climbed from 5.2% to just over 8.0% fueled by concerns about federal spending. With some guidance from Robert Rubin, the Clinton Administration and Congress made an effort to reduce the deficit.

The yield of the 10-year note dropped to approximately 4% by November 1998.

That ugly chapter began in February, when the Federal Reserve began boosting short-term rates in response to signs of a strengthening economy, as well as rising prices in the commodity markets.

In a normal, unleveraged environment, the rise might have calmed inflation worries and even brought long-term rates down a bit. But instead, the initial 25-basis points increase, from 3% to 3.25%, in the overnight federal funds rate triggered an immediate 40-basis-point increase in the 30-year Treasury rate as leveraged bondholders were forced to quickly liquidate their positions to curtail mounting losses in their bond portfolios.

In this bond market massacre bond investors suffered over one Trillion US-Dollars in loses.

Below are some additional events of this Shemitah year that changed the world financial landscape:

  • On January 1st 1994, the North American Free Trade Agreement (NAFTA) between the USA, Canada and Mexico was approved.
  • On November 1st 1993, the Maastricht Treaty, undertaken to integrate Europe was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands, and became effective.

The 1986 - 1987 Shemitah:
This Shemitah year started on October 4th 1986 and ended on September 23rd 1987.

On Monday, October 19, 1987, (Black Monday) stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%) as can be seen from below chart.

The 1979 - 1980 Shemitah:
This Shemitah year started on September 22, 1979 and ended September 13, 1980.

In 1980, the Saving and Loan crisis was blooming and everyone was talking about the "stagflation" that we were experiencing under Jimmy Carter. The Federal Reserve raised interest rates dramatically to combat inflation, and this helped precipitate the very deep recession that we experienced early in Ronald Reagan's first term.

In this period Oil prices spiked above US$ 33.00 a barrel, which corrected for inflation, is today the equivalent to US$ 200.00 a barrel. Gold also surged to USD 860.00 an ounce, which corrected for inflation, is today equivalent to US$ 2,300.00 per Troy Ounce.

In this period, on the geopolitical front we experienced the start of the 8-year IRAQ - IRAN war, when Iraq invaded Iran via air and land on September 22nd, 1980.

The 1972 - 1973 Shemitah:
This Shemitah year was between September 9, 1972 and September 26 1993.

On October 6 1973, 10 days after the end of this Shemitah, the Yom Kippur War, Ramadan War, or October War started. This war was between a coalition of Arab states led by Egypt and Syria against Israel and lasted until October 25, 1973.

As a  consequence of the Yom Kippur War, the 1973 oil crisis started in October 1973 when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members of OPEC, plus Egypt, Syria and Tunisia) proclaimed an oil embargo. By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly US$12.

Below graph shows the oil prices from 1861–2007, in which a sharp increase in 1973, and again during the 1979 energy crisis. The orange line is the adjustment for inflation.

The spike of oil prices in this period triggered a 1973-1974 stock market crash and recession that began in 1973 and ended up stretching all the way until 1975.

It is worth mentioning, that the original World Trade Center featured twin towers landmark, which were destroyed in the September 11, 2001 attacks (Shemitah year 2000 -2001), for which the groundbreaking activities had started on August 26, 1966 (Shemitah 1966-1967) had been officially opened / inaugurated in the Shemitah year 1972-1973, on April 4, 1973.

List of shemithah (sabbatical) years and major events that happened in the this 100-year period:

  • September 28, 1916 - September 16, 1917
    • United States joins WWI.
    • Collapse of the Russian government and the 1917 revolution.
  • September 17, 1917 - September 6 1918
    • Jubilee - Balfour Declaration.
  • September 11, 1923 - September 28, 1924
    • Hitler writes Mein Kampf.
    • Death of Lenin, Stalin wins power struggle.
  • September 23, 1930 - September 11, 1931
    • Nazis gain in German elections.
    • Japanese occupation of Manchuria.
  • September 6, 1937 - September 25, 1938
    • Japan invades China, Hitler marches into Austria.
  • September 18, 1944 - September 7, 1945
    • Establishment of IMF and World Bank.
    • Atomic bomb dropped on Japan, End of WWII.
    • United Nations established, Model of the World Trade Center designed.
  • October 1, 1951 - September 19, 1952
    • Establishment of European Coal and Steel Community.
    • Treaty of San Francisco officially ends World War II.
  • September 15, 1958 - October 2, 1959
    • Establishment of European Economic Community.
  • September 27, 1965 - September 14, 1966
    • Start of the New York World Trade Center construction.

PGM CAPITAL COMMENTS:
It is not our intention to produce an encyclopedic reference on this subject. Those interested can do a Google search or pick up a Bible. Instead we present the basic foundation for what is one of the most fascinating occurrences in our time.

Some of you may be familiar with Jonathan Cahn’s book ‘The Harbinger’ or John Hagee’s book ‘Four Blood Moons’, both of which touch on the fascinating earthly ‘coincidences’  that surround the recent Shemitah years and biblical blood moon tetrads. But as a market watcher, we have taken the unique dates associated with these celestial occurrences which we have shown to you in this blog article.

The big question most investors would be asking themselves is;

Is the Shemitah year 2014 to 2015 a repetition of calamity?

Last Thursday, September 25, another Shemitah began (New Moon Sept 24th) and will end on September 13th 2015. The last two iterations, as we outlined above, were ‘book ended’ with calamity at the beginning of the cycle and at the end of the cycle with an aftermath.

We are only reporting the facts, you decide if these dates and events are just coincidences or set in place by a higher power. If calamity were to strike again, will it be a break-out of war or terrorism? A financial meltdown in stocks, bonds, US dollar, political upheaval, environmental catastrophe, like a major earthquake or pandemic or perhaps world peace? God only knows.

If this Shemitah cycle is potentially market impacting, perhaps the technical tools and fundamental research that we employ will help us identify a major market movement in this period.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

25Sep/140

Midweek Market Update

By Michael Panneflek

Market updateDear PGM Capital Blog readers,

In this midweek’s blog edition, we want to highlight some of the most important events for the week of September 22 and September 26, 2014.

  • Greed and Fear
  • Must see internet links
  • Technical market outlook

Greed and Fear

This week we will discuss a controversial subject. The subject is Greed and Fear and this is more about market psychology then fundamental or technical market indications.

Technical analysis acknowledge the concept of Greed and Fear as market driving force by stating:

Buyers and sellers move markets based on expectations and emotions (fear and greed).

Greed and Fear is difficult to measure by itself, there are a tools like the Greed and Fear index or the VIX index, but these are just calculated numbers by algorithms which mostly give you a glimpse into the past, but will hardly give you any trustworthy indication of where we are or where we are heading.

To get a more accurate read of where we are on the Greed and Fear scale, we have to look more into the market psychology, emotions and behavioral economics.

Cycle of Market Emotions

Cycle of Market Emotions

The Cycle of Market Emotions is a simple representation of how emotions do move the markets and that emotions in the market are acting like a cycle and market emotions will let markets react to extremes and that's why we see bubbles and crashes happening.

Benjamin Graham described market emotions in his book "The Intelligent Investor" very well by comparing the market to a real person by calling it Mr. Market:

Mr. Market is often identified as having human behavioral manic-depressive characteristics, it:

  1. Is emotional, euphoric, moody
  2. Is often irrational
  3. Offers that transactions are strictly at your option
  4. Is there to serve you, not to guide you.
  5. Is in the short run a voting machine, in the long run a weighing machine.
  6. Will offer you a chance to buy low, and sell high.
  7. Is ‘frequently efficient…but not always.

This behavior of Mr. Market allows the investor to wait until Mr.Market is in a 'pessimistic mood' and offers low sale price. The investor has the option to buy at that low price. Therefore patience is such an important virtue when dealing with Mr. Market.

When the book of Benjamin Graham was released in 1949, times were different, we didn't had 24 hours TV broadcasting, social-media and highly efficient and super-fast communication networks. Basically these new media and communication technologies will just amplify the emotions in the markets to even bigger extremes. But the media can also give us a great indicator to where we might be in the Cycle of Market Emotions.

This comedy clip by The Daily Show portraying the Alibaba IPO last week, gives glimpse into the mentality that is right now happening in the stock markets. There is a lot of euphoria and very little critical questions asked if this stock market rally is sustainable in the long term. Here another video to give an idea what is going on in the market these days:

On the other side, when we see a red day between all these green days, it sounds like a small panic in the media, while some healthy pullbacks in the market are nothing unusual, especially after such a strong run in the equities. Here is two videos to show you the unrealistic views that are in the markets (please remind yourself that the markets are at near all time highs):

There are much more examples of this and the general sentiment on the equity market is very bullish with no end in sight. While we of PGM Capital have been looking at the fundamental data for a long time and advising to be cautious and warning of potential bubbles that are created from all the cheap money printed by the central banks, we can observe this "bull market with no end in sight" mentality on Wall Street.

While this analysis is mostly subjective and based from personal market observation, there are a lot of opinions on this subject. What we can conclude is that:

  • On bullish days we see a lot of euphoria and high amount of greed "bull-market with no end in sight"
  • On bearish days we see a lot of nervous voices, mixed with comments "this is an opportunity to buy cheap"

We don't know when we might see a bigger stock market correction, but it is clear that emotions are running very high and this is always been an explosive combination in the past when it comes to bursting bubbles.

Lets not forget one fundamental fact, around the world central banks are still in "crisis" mode for more then 5 years and are very slowly trying to turn around, while equity markets are at all time high.

Must see internet links

Please take your time to read/watch the following links that we have posted below.

Technical market outlook

This week we will look at the equity markets and give short-, mid- and long term sentiment indicators. To represent the equity markets we will use the S&P 500, the FTSE, DAX and the Hang Seng.

Short Term - Multi-day trends (7 up to 60 days)

  • S&P 500: Bearish
  • FTSE 100: Bearish
  • DAX: Neutral / Bearish (Near a bearish crossover point)
  • Hang Seng: Bearish

Mid Term - Multi-week trends (4 weeks up to 6 months)

  • S&P 500: Bullish / Neutral (Near a neutral crossover point)
  • FTSE 100: Neutral / Bearish (Near a bearish crossover point)
  • DAX: Neutral / Bearish (Near a bearish crossover point)
  • Hang Seng: Neutral / Bearish (Near a bearish crossover point)

Long Term - Multi-month trends (3 months up to 5-6 years)

  • S&P 500: Bullish
  • FTSE 100: Bullish / Neutral (Near a  neutral crossover point)
  • DAX: Bullish
  • Hang Seng: Bullish

While a short term bear market is nothing to worry about, but if a short-term bear market continues without any major recovery, it might trigger mid- and long-term bearish sentiment which can lead to broader sell offs in the market.

As a comparison the long term bull-market sentiment for the S&P 500 has been in place since December 2009 without any interruption. A bearish crossover in the long-term sentiment will trigger some major sell orders which can lead to a prolonged equity bear-market.

We will keep you updated on the technical market aspects.

Last but not least, before following any investing advice, be aware that above outlook is of pure technical nature and does not respect any global macro events that will disturb this outlook. Please always consider your investment horizon and risk tolerance and financial situation.

Yours sincerely,

Michael Panneflek

20Sep/140

The Alibaba IPO of September 19 2014

By Eric Panneflek

Alibaba (1)

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you, the "Alibaba Group Holding" that went IPO on Friday September 19, 2014.

ABOUT ALIBABA HOLDING GROUP:
Alibaba Group Holding Limited (NYSE: BABA) is China’s largest retailer.

Originally founded 1999 by an English schoolteacher by the name of Jack Ma, Alibaba has carved its place via alibaba.com, which connects Chinese suppliers of pretty much anything with buyers, within the Chinese Internet consumer market and expanded its reaches into every single possible thing, from online auctions to messaging and payments.

Alibaba.com has since expanded to launch other websites - including Taobao and Tmail - which now dominate the e-commerce market.

Jack-Ma

Alibaba founder Jack Ma

It also has major investments in the Chinese equivalent to Twitter (Sina Weibo), a YouTube-esque site called Youku Tudou and owns 50 percent of China’s most successful football club, Guangzhou Evergrande.

In 2012, two of Alibaba’s portals together handled 1.1 trillion yuan (US$170 billion) in sales, more than competitors eBay Inc (NYSE: EBAY) and Amazon.com Inc (NASDAQ: AMZN) combined.

The company's turnover in 2013 was US$6.73 billion and is expected to be much more this year. As a comparison, Facebook made US$3.7 billion in 2011, just before it had its own IPO which ended up giving the social networking company a value of more than $100 billion. More exciting is the company’s increase in profits, which have tripled in a year.

As can be seen from below pie-chart, it is responsible for 80 percent of all online sales in China - the world’s second biggest economy after the United States - and handles more transactions than eBay and Amazon combined.

Alibabas Share of Internet Retail Sales in China

The company primarily operates in the People’s Republic of China, and in March 2013 was estimated by The Economist magazine to have a valuation between US$55 billion to more than US$120 billion.

Furthermore, Alibaba’s strategy of creating a worldwide e-commerce empire with its own financial services has attracted close scrutiny from China’s regulators and resistance from the country’s banks.

THE ALIBABA GROUP IPO:
An IPO could further fuel the company as it continues to gain control over the mobile shopping and social media venues.

On 5 September 2014, the group—in a regulatory filing with the U.S. Securities and Exchange Commission—set a US$60- to US$66- per-share price range for its scheduled initial public offering (IPO), the final price of which would be determined after an international roadshow.

Let us flex the numbers in below table to see what the Chinese e-commerce giant might fetch in an IPO.

alibaba-could-be-chinas-next-100-billion-ipo

With is IPO date of September 19, it is  going to release 368 million shares (with a starting price between $66 and $68 per share) onto the New York Stock Exchange in order to raise around US$25 billion in funds that it can then use to expand the company to the US and Europe.

  • On 18 September 2014, Alibaba's IPO priced at US$68, raising US$21.8 billion for the company and investors. Alibaba is the biggest U.S. IPO in history.
  • On September 19, 2014, Alibaba's shares (NYSE:BABA) began trading on the NYSE.
  • The stock opened at US$92.70 shortly before noon ET and quickly rose to a high of US$99.70, before paring gains to close at $93.89 an increase of 38 percent on its market debut.
  • Some 271 million shares changed hands on the IPO date.

Below chart shows the performance of the Alibaba Group shares on their market debut date of Friday September 19, 2014.

September 19 2014, Alibaba IPO stock performance

Alibaba flags and banners decorated the NYSE façade in orange and white. Inside, executives mixed with a press pack including 130 Chinese journalists, reflecting the excitement in Alibaba’s home market around its offering

PGM CAPITAL COMMENTS:
At the close of the market on Friday, September 19 2014, the Chinese e-commerce company had officially logged the biggest Initial Public Offering (IPO) in US history, raising US$21.8 billion in its first day on the New York Stock Exchange.

Less than half of the funds raised will actually go into Alibaba's accounts, however, with the rest a moneymaking bonanza for insiders. The biggest windfall in terms of pure cash goes to Yahoo, which received 40 percent of Alibaba in exchange for US$1 billion and control of Yahoo China in 2005.

Yahoo already made US$7.6 billion when it sold some stock back to Alibaba in 2012. Now it has earned about US$8.3 billion from a quarter of its remaining stake, while still retaining 16.3 percent of the internet giant.

The company's earnings give it a market capitalization of over US$231 billion, "putting it at the close of the market on Friday September 19,  among the 20 biggest companies by market cap as can be seen from below table.

No. Ticker Company Country Market Cap  P/E Price [USD]
1 AAPL Apple Inc. USA 604.53B 16.31 100.96
2 XOM Exxon Mobil Co. USA 414.18B 12.37 97.12
3 GOOG Google Inc. USA 403.18B 31.23 596.08
4 MSFT Microsoft Co. USA 391.55B 18.07 47.52
5 BRK-A Berkshire Hathaway Inc. USA 347.68B 18.07 212000.00
6 JNJ Johnson & Johnson USA 304.56B 19.96 107.99
7 WFC Wells Fargo & Company USA 278.56B 13.18 53.36
8 GE General Electric Co. USA 263.79B 18.01 26.29
9 ROG.VX Roche Holding AG Switzerland 258.42B 19.70 292.71
10 RDSA.AS Royal Dutch Shell plc Netherlands 255.53B 15.23 78.75
11 NVSN.VX Novartis AG Switzerland 253.73B 23.95 93.90
12 0491.HK China Mobile Limited Hong Kong 250.86B 13.18 61.43
13 WMT Wal-Mart Stores Inc. USA 247.62B 16.08 76.84
14 NESN.VX Nestle SA Switzerland 240.89B 21.30 74.70
15 0857.HK PetroChina Co. Ltd. China 238.952B 11.38 134.51
16 CVX Chevron Corporation USA 236.99B 11.91 124.80
17 BABA Alibaba Group Ltd China 231.90B 300 93.89
18 JPM JPMorgan Chase & Co. USA 229.85B 15.79 61.11
19 PG Procter & Gamble Co. USA 228.65B 21.60 84.47
20 VZ Verizon Communications USA 208.71B 10.69 50.35
21 HSBC HSBC Holdings plc UK 206.84B 13.45 53.95
22 TM Toyota Motor Co. Japan 203.57B 10.94 118.76
23 FB Facebook, Inc. USA 202.56B 84.68 77.91

Above table shows that Alibaba, which became the largest USA IPO, based on its closing price of Friday, September 19, ranked as the world's 17th biggest company by market capitalization.

Above table proves also that most of the companies in the top 23 table have very high valuation, which due to this can therefore be considered overvalued.

Stock-Bubble

Alibaba IPO goes to the extreme of what we have saw last year with social media stocks IPO, flying high with (almost) no fundamentals to back up their stock price and subsequent market cap.

To those who believe they have to go with the flow and that Alibaba is worth whatever the market says its worth, please indulge us in a little rundown of reasons why Alibaba at current price is overvalued:

  • 300x times current earnings – it takes a lot of real earnings growth to justify such a lofty multiple.
  • Little room for expansion (at least in China) – Anyone who wants to be listed on Alibaba is listed on it. The only real new businesses who sign up for it are new businesses.
  • Little room for increasing share of current customers – Alibaba, for now, serves one purpose: Linking manufacturers and those looking to source in China. Once the two parties hook up, there is no need for Alibaba to continue their business relationship.
  • A Small Moat – The only real thing that Alibaba has going for it is the network effect – there’s nothing special about their brand or the software that runs the site.

As a long term investor we've seen similar hypes and crazy behavior of the markets in 1998 and 1999, when Internet and dot.com stock with no earnings or intrinsic value, went IPO and rose like a rocket. Back then they called it innovation and New Economy.

Ladies and Gentlemen, the rule of money is timeless, it has never changed, it is and will always be about, cashflow, earnings intrinsic value and sustainable business model.

And when the hype is over and reality calls, the prices of these so-called high flyers of today will implode bringing them to their real and realistic valuation.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek