Micron Technology Buy On Weakness Trade Is On Like Donkey Kong

The stock of Micron Technology looks like a classic buy on weakness trade after the company reported excellent earnings and revenue beats but the stock sold off big time. The profit taking seems a bit extreme which may have caused some panic selling.

Micron Technology reported Q3 revenue rising 20% from the prior quarter, and 92% from the prior-year period, to $5.57 billion, yielding EPS of $1.62. Analysts had forecast $5.4 billion in revenue, and $1.52 per share in net income.

Micron President and CEO Sanjay Mehrotra said, “Micron delivered strong operational performance in the third quarter with free cash flow nearly double last quarter, which enabled us to retire $1 billion in debt. Our results reflect solid execution of our cost reduction plans and ongoing favorable industry supply and demand dynamics. The global trends taking shape today, including machine learning and big data analytics, are exciting and create significant opportunities for Micron. We are focused on positioning the company to realize these opportunities by investing in technology and products while also strengthening our balance sheet.”

Compared to an average industry Price/Earning Ratio of 25.63, Micron Technology is valuated rather cheaply. On top of this MU is cheaper than 86% of the companies listed in the same industry.

Micron Technology Stock Chart

Large players really dumped a lot of MU shares which is a warning sign. The Twiggs Money Flow also went negative which is another warning sign. I would wait before taking an entry in this stock. Look for some consolidation first so that you’re not trying to catch a falling knife. You can also use the Twiggs Money Flow as a signal on when to go long. When the Twiggs Money Flow breaks back above the zero line, and the large players volume starts rising, that’s the buy signal.

GO HERE TO CHART LARGE PLAYERS AND THE TWIGGS MONEY FLOW LIKE THE CHART ABOVE… AWESOME TOOL

Square Stock Consolidates On Momentum Squeeze Setup

For the last couple of weeks Square stock has been consolidating and is now in a momentum squeeze setup. This consolidation period looks like a compelling entry especially considering that Square’s revenue is rapidly growing.

When comparing the growth rate of the last year to the growth rate of the upcoming 2 years, we see that the growth is accelerating. Based on estimates for the next 2 years, SQ will show a very strong growth in Earnings Per Share. The EPS will grow by 80.27% on average per year.

SQ has a Current Ratio of 2.42. This indicates that SQ is financially healthy and has no problem in meeting its short term obligations.

Institutional traders have increased their long positions in Square by a whopping 19.5% over the last 3 months.

Square Stock Chart

SQ presents a good setup pattern even though large player volume has been falling. Prices have been consolidating lately and the volatility has been reduced forming a momentum squeeze.

A pullback is taking place in Square stock, which may present a nice opportunity for an entry. There is a support zone below the current price at 23.45, a stop order could be placed below this zone.

GO HERE TO CHART LARGE PLAYERS AND THE TWIGGS MONEY FLOW LIKE THE CHART ABOVE… AWESOME TOOL

Alarm.com Beats on Earnings and Revenue

May 09, 2017: Alarm.com reports Q1 EPS of $0.23 versus the $0.15 estimate. Revenue also beat coming in at $74.2 million versus the $69.4 million estimate.

– Adj EBITDA $14.1M, +30% y/y
– SaaS and license revenue $50.2M, +26% y/y

December 12, 2016: Seeing heavy call activity 2400 Mar 35 calls traded at $0.70.

November 30, 2016: Maxim initiates coverage of Alarm.Com Holdings with a Buy rating, and a price target of $37.

November 14, 2016: Alarm.Com Holdings reports Q3 EPS of $0.19 versus the $0.11 estimate. Revenue also beat coming in at $67.8 million versus the $59.8 million estimate. The company names Steve Valenzuela the new CFO, effective November 15, 2016.

The CEO said, “Along with our service providers, we remain well positioned to capture growing momentum in the market for connected home and business solutions. At the same time, we continued to invest in our platform to open new market opportunities for Alarm.com and our partners. Valenzuela joins Alarm.com from SugarCRM, where he served as CFO since January of 2015.”

Alarm.com is the leading platform solution for the connected home. Alarm.com makes connected home technology broadly accessible to millions of home and business owners. Our cloud-based services enable home and business owners to intelligently secure their properties and automate and control a broad array of connected devices through a single, intuitive user interface.

Stock Market Prediction Show For the Week of December 12 2016

A weekly Saturday night show that attempts to predict market direction for the week ahead by looking at a variety of technical and fundamental indicators.

This week’s show features Trump’s comments about bringing down drug prices, the incredible trial results from Bellicum Pharmaceuticals that cured all 35 children in the trial, takeover rumors surrounding Depomed, Hooker Furniture crushing earnings and revenue estimates, the candle over candle reversal on Cytosorbents after they received a new reimbursement code from Germany, Volaris candle over candle reversal after they announced a new flight route called Volaris Costa Rica, Calavo Growers candle over candle reversal after receiving a Buy rating from Vertical Group, and more.

Insider Buying In Spark Energy

Spark Energy has had heavy insider buying over the last few weeks. The Director Maxwell W Keith III bought $273,564 worth of stock on November 23, 2016. Two days earlier, on November 21, 2016, Vice President and General Counsel Melman Gil bought $14,922 worth of stock.

Spark Energy operates as an independent retail energy services company in the US. It operates through two segments, Retail Natural Gas, and Retail Electricity. The company is involved in the retail distribution of natural gas and electricity to residential, commercial, and industrial customers. As of December 31, 2015, it operated in 66 utility service territories across 16 states and had approximately 328,000 residential customers and 19,000 commercial customers. Description from Finviz.

Spark Energy Stock Chart

Comments: Lots of resistance above the current price. There is 200-day moving average resistance at $26.86 and then 150-day moving average resistance at $28.25. The Twiggs Money Flow is below the 0% line which suggests weakness in the stock.

The stock trades at an excellent forward P/E ratio of 9.7 and has fantastic quarterly revenue growth of 73.2% YoY.

Disclosure: I do not have any position in SPKE.

Heavy Insider Buying on Franklin Financial Network

Franklin Financial Network provides various banking and related financial services to small businesses, corporate entities, local governments, and individuals.

Franklin Financial Stock Chart

Chart Comments: Testing previous resistance at around $38. Inverted hammer with long upper shadow is bearish and may indicate a pullback is coming. Wait for close above $38 before long entry. Twiggs Money Flow is pulling back a little but still above 0% line. Watch where next low on Twiggs Money Flow forms, bullish if following low forms above 0% line. Big insider buying on November 21, 2016, this is the first insider buying since May of 2015. Excellent revenue and earnings growth. Attractive valuation of P/E 16.7 and forward P/E 13.4. Piper Jaffray just began coverage on November 22, 2016, with an Outperform rating.

Disclosure: I do not hold any position in this stock.

With So Much Debt In the US Economy, Is It Even Possible To Grow Faster?

The US national debt just broke above $19.5 trillion. Both Democrats and Republicans are to blame, but it is important to note that President Obama and Democrats increased the national debt more than all President’s before combined.

George Bush exploded the national debt by $3 trillion in response to an imploding economy and 911. Obama exploded the national debt by $10 trillion in response to an imploding economy.

Debt increases are a function of the government not being able to pay its bills because it has too little revenue (taxes) compared to costs (spending). When spending exceeds revenue you have a deficit. Since 2002, this is what quarterly deficits (or surpluses) have looked like.

The last time we have a surplus was back in 2001, some 16 years ago. That’s sad.

The interest on the $19.5 trillion dollar debt is about $482 billion a year or more than $60,000 per US citizen.

How does the US government finance the deficit?

The Crowding Out Effect

The U.S. Treasury sells IOUs in the form of bonds or treasury bills directly to the private capital markets and uses the proceeds of the sales to finance the deficit.

The US Treasury is competing directly in the capital markets with private corporations, which may also be seeking to sell bonds and stocks to raise money to invest in new plant equipment. To compete for these scarce investment dollars, the Treasury typically must increase the interest rate it is offering to attract enough funds. Running a huge deficit is largely a zero sum game because funds to finance the deficit would otherwise be spent on private sector investment (the I variable in the GDP formula).

Money used to finance the deficit is money that would otherwise have been borrowed and spent by corporations and businesses on private investment. Deficit spending by the government is said to crowd out private investment. Crowding out is the offsetting effect on private expenditures caused by the government’s sale of bonds to finance the deficit. The larger the deficit and the more government needs to spend on financing that deficit, the more crowding out occurs.

The crowding out effect, which is one of the most important concepts in macroeconomics, is illustrated below.

The initial equilibrium is at Y, where the aggregate expenditure curve AE, crosses the aggregate production curve AP. However, expansionary fiscal policy shifts the aggregated expenditure curve up to AE1. This leads to a new equilibrium of Y1. However, because the government has had to borrow money from the private capital markets to finance these expenditures, interest rates rise. This reduces investment and a resulting contractionary effect shifts the aggregate expenditure curve back down from AE1 to AE2.

The final equilibrium is now at Y2 as the net economic expansion equals Y2 minus Y. At the same time, the partial crowding out of private investment may be measured by Y1 minus Y2. The level of partial crowding out rises the more government borrows from the private sector.

It is my opinion that government deficits are a weak fiscal policy tool at best, and I think the last eight years of President Obama increasing the national debt and running the largest deficits in US history has proven that point.

A few readers have asked me if crowding out can be reduced by printing money. The idea is to avoid crowding out by printing money and here is how that scheme works. The Federal Reserve accommodates the Treasury’s expansionary fiscal policy by buying Treasury’s securities itself rather than letting the securities be sold in the open capital markets. In essence, the Federal Reserve simply prints new money.

The problem with this option is that the increase in the money supply can cause inflation. Moreover, if such inflation drives interest rates up and private investment down, as it is likely to do, the result of the print money option will be a crowding out effect as well. In other words, there is no escaping the crowding out effect when it comes to financing the deficit. Again, look at the last eight years of President Obama and look out how much he has put this country in debt and ask yourself has it really benefited the U.S. economy that much? Perhaps some, but ultimately crowding out took away much of the initial gains from Democrat’s expansionary fiscal policy.

Deficits Impact On International Trade

Deficits and a rising government debt is a serious threat to the US. Chronic budget deficits have not only been responsible for crowding out private investment, but also for America’s huge trade deficits over the last several decades. The macroeconomic relationship between deficits and international trade is illustrated below.

As government deficits drive interest rates up in boxes 1 and 2, we observe crowding out in box 3. Now look at box 4. Higher US interest rates attract foreign investors but, for these investors to invest, they must exchange their foreign currencies for dollars. This not only leads to an increase of US external debt in box 5, but it also drives up the value of the dollar in box 6. A stronger U.S. dollar makes U.S. exports less competitive, and exports decrease in box 7 even as imports increase in box 8. The result is a larger trade deficit in box 9, and that’s why economists refer to budget and trade deficits as the “twin deficits.”

A trade deficit means a country is not exporting enough to pay for its imports. The difference can be paid by either borrowing from abroad or by selling US assets.

Mortgaging America

To finance its trade deficit, the US has had to sell off assets such as factories, shopping centers, hotels, golf courses, and farms to foreign investors. This mortgaging of America has reduced both the rate of economic growth and the level of real income of Americans.

Deficit Doves Say Don’t Worry

Deficit dove economists that work for Democrats and the Obama Administration say don’t worry about the national debt because most of that debt is internal debt owned by the country to its citizens. Obviously, that argument by Democrat economists is not so good as evidenced by the broken US economy some eight years after Democrats and Obama took office. I list four reasons below why this “don’t worry be happy” argument is wrong and how it has hurt the US economy.

#1: Internal Debt Leads to Higher Taxes

Internal debt requires payments of interest to bondholders. This, in turn, means higher taxes which distort the allocation of national resources and lead to an efficiency loss.

#2: Internal Debt Redistributes Income From Poor To Rich

Paying interest on the internal debt unfairly redistributes income from the poor and middle class to the rich. This happens because government bondholders as a group tend to be wealthier than taxpayers as a group.

#3: Servicing The Debt Cuts Government Services

Paying interest on the debt uses $482 billion each year, and this money could otherwise be spent on providing taxpayers with more education, health care, and other government services. The size of the interest payments to service the debt, relative to total tax revenues, has been rising every year. If nothing is done, we will eventually wind up using all available tax revenues simply to service the debt.

#4: A Burden On Future Generations

The accumulation of such a large debt places an unreasonable burden on future generations, which must pay this debt off. I don’t know what to even tell my daughters about the $19.5 trillion national debt, so I choose to say nothing. I could say I voted for Obama because I wanted to vote for the first African-American President and I thought he would save our household money on medical care. Then say, oops, my bad, now here’s the $9 trillion he added to the national debt during his Presidency that you have to pay off when you’re old enough to work. Thank you and have a nice day.

Niall Ferguson thinks that the “age of debt” is coming to an end. Apologies for the sub-titles but this Hard Talk interview has an important message.

With a growing crowding out effect, it may be impossible to increase GDP in a meaningful way until the national debt and deficit spending is reduced.

TEGNA Nice Way To Profit From Increased Political Ads

TEGNA Inc operates 46 television stations that produce local programmings, such as news, sports, and entertainment. The company also operates Cars.com, CareerBuilder, among other digital properties.

TEGNA is the largest independent owner of NBC and CBS affiliates. Profit more than doubled in the most recent quarter because of political advertising. The Wall Street Journal writes

Chief Executive Gracia Martore said the company expects political revenue to ramp up steadily in the third and fourth quarters as a longer-than-usual primary process led to delayed ad purchases from front-running candidates. She also pointed to “robust advertising from the Olympics this summer driven by our strong NBC footprint.”

TEGNA Stock Chart

The chart shows a beautiful candle over candle reversal that has breached above the speed lines.

I like the stop loss just below $20.82 in case the trade goes south.

Disclosure: I do not hold any stock in TEGNA at the time of publishing this article.

Deadly Parasitic Derivative Collapse Spreading Through Global Markets

Deutsche Bank may be on the verge of collapse. Last week Deutsche Bank reported Q2 2016 earnings of 20 million euros which is a 98% drop in earnings year-over-year.

In 2015, Deutsche Bank announced its first full year of loss since the 2008 recession.

Deutsche Bank’s stock is down -60% over the last year meaning that the bank is close to collapse.

Deutsche Bank’s shares now trade for two-thirds less than their tangible book value, a steeper discount than even during the depths of the financial crisis.

Beyond Germany, few stock traders care if Deutsche Bank collapses. The problem with Deutsche Bank collapsing is its enormous derivatives portfolio valued at 42 trillion euros! To put in perspective, the entire EU (all 28 member states) has an estimated GDP value of 14.3 trillion. Deutsche Bank’s 42 trillion euro derivatives portfolio is about three times the size of the entire EU!

One might think that with such a high exposure to the derivatives market, Deutsche Bank would have already collapsed. The reason Deutsche Bank has not collapsed is because of something called netting. For every derivative position Deutsche Bank holds, they hold another position in the opposite direction, so they roughly cancel each other out. At least that’s what Deutsche Bank is reporting that they are doing. Whether that is true or not remains to be seen. Why would anyone hedge their longs with shorts in a 1:1 ratio? You would never make any money from trading, and you would slowly lose on slippage. The OCC tracks netting on U.S. banks and does, in fact, show that even with netting, net current credit exposure (NCCE) has been rising rapidly since 2014.

When Deutsche Bank collapses, it is going to be the explosion heard around the world, and it will be a disaster many times greater than the collapse of Lehman Brothers in 2008.

US Derivatives Exposure

The big U.S. banks have higher exposures to derivatives than Deutsche Bank. As of June 30, 2016, below are U.S. banks with the largest derivative exposures.

Citigroup has amassed the largest stockpile of interest-rate swaps as they bet on central bank rate changes.

Five U.S. banks hold 93% of all derivatives: Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, and Morgan Stanley. The total value of these derivatives is $247 trillion (notional).

Morgan Stanley has $31 trillion in derivatives with $1.6 trillion (notional) in credit derivatives. What is scary is that Morgan Stanley is back to speculating in the same credit derivatives market that took down AIG in 2008. I don’t think Morgan Stanley necessarily wants to speculate in credit derivatives but with revenue flat the last few years, they may be getting more desperate to prop up their stock price. Morgan Stanley’s stock is down more than -25% over the last year.

Most traders in the U.S. don’t care about Morgan Stanley’s risky credit derivatives portfolio, but they should. Morgan Stanley has more than 15,770 retail brokers managing $404 billion of other people’s money (mom and pop savings, retirees, pensions, retirement accounts, etc.cause). Morgan Stanley’s risky credit derivatives position poses a huge threat to the investing community in my opinion.

Banks and Financial Firms Will Not Disclose Information Until It’s Too Late

If you are waiting for banks and financial firms to disclose risks and even how much they were bailed out from the last time they made risky credit derivative bets, don’t.

Wall Street On Parade writes

To survive the 2007-2009 Wall Street crash, Morgan Stanley received an injection of $9 billion from the Japanese bank, Mitsubishi UFJ Financial Group; a $10 billion injection from the U.S. government and over $2 trillion in secret, cumulative, below-market-rate loans from the Federal Reserve. According to data obtained by Bloomberg News following a multi-year court battle to obtain the information from the Federal Reserve, Morgan Stanley’s one-day secret outstanding loans from the Fed peaked at $107.3 billion on September 29, 2008.

The public would have never known about these secret loans shoring up Wall Street’s reckless conduct and hubris and obscene bonuses except for the court battle of Bloomberg News and legislation secured by Senator Bernie Sanders of Vermont requiring a Fed accounting.

Credit Derivatives Exposure On the Rise In the US

The Office of the Comptroller of the Currency reports some scary facts in their most recent quarterly OCC report.

– Insured U.S. commercial banks and savings associations reported trading revenue of $5.8 billion in the first quarter of 2016… $1.9 billion lower (24.9 percent) than a year earlier. [In my opinion, when trading revenues are down, trading divisions take on more risks in a desperate attempt to meet quotas like buying riskier credit derivatives as the data points below confirm].

– Credit exposure from derivatives increased in the first quarter of 2016. Net current credit exposure (NCCE) increased $65.1 billion, or 16.5 percent, to $460.1 billion.

– Notional derivatives increased $12.0 trillion, or 6.6 percent, to $192.9 trillion.

– Derivative contracts remained concentrated in interest rate products, which represented 76.3 percent of total derivative notional amounts.

Using Derivatives To Bet On Interest Rate Changes

The OCC reports

Measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted. The total of all contracts with positive value (i.e., derivative receivables) to the bank is the gross positive fair value (GPFV) and represents an initial measurement of credit exposure. The total of all contracts with negative value (i.e., derivative payables) to the bank is the gross negative fair value (GNFV) and represents a measurement of the exposure the bank poses to its counterparties.

GPFV increased by $0.8 trillion (26.6 percent) in the first quarter of 2016 to $3.8 trillion, driven by a 29.9 percent increase in receivables from interest rate and FX contracts. Because interest rate contracts make up 76.2 percent of total notional derivative contracts, changes in interest rates drive credit exposure in derivative portfolios. Declines in interest rates tend to increase exposure. This effect has increased in recent years, as the maturity profile of interest rate derivatives has increased, making credit exposure more sensitive to changes in longer-term rates.

Credit risk exposure increased a whopping 26.6% in Q1 2016. Much of that increased credit risk exposure is coming from bets on Federal Reserve rate hikes. If interest rates go up, credit risk exposure in derivative positions goes down. If interest rates go down, credit risk exposure goes up. In other words, most of the bets in the derivatives market are on interest rates rising. Better hope Janet Yellen doesn’t have to lower interest rates!

Credit Default Swaps Dwarf All Other Forms of Derivatives

Credit default swaps dwarf any other form of credit derivative trading.

The OCC reports

The notional amount for the 54 insured U.S. commercial banks and savings associations that sold credit protection (i.e., assumed credit risk) was $3.6 trillion, up $206.4 billion (6.0 percent) from the fourth quarter of 2015. The notional amount for the 50 banks that purchased credit protection (i.e., hedged credit risk) was $3.8 trillion, $224.9 billion higher (6.3 percent) than in
the fourth quarter of 2015.

It is interesting that many people are reporting having received a letter from their credit card company informing them that their interest rate is going up from 19.9% to 25% in August 2016. Some people have even reported receiving credit limit increase letters too. How kind of these bankers to go long credit default swaps while raising your credit limit and interest rate to insane levels at the same time.

Folks derivatives are dark financial products that cause excessive risk taking that ultimately leads to disaster. I have little doubt that the next global financial crisis will, at its core, once again involve speculative derivatives betting.