What Lies Ahead For Stocks In April? What Tends To Occur For Stocks In Mid-Term Election Years? ‘Cannabis Inc.: Barron’s Looks At The Burgeoning Marijuana Industry In Canada — ‘Time To Weed Out The Hype’
First of all, I hope all of you are able to have a nice Easter weekend. The weather hasn’t been all that great here in the northeast; but, major league baseball is underway, there is no kneeling for our national anthem; and, The Master’s golf tournament is less than a week away…..so, better things are on the horizon and I think that applies to the U.S. stock market as well.
While we started 2018 much like we ended 2017, we know now we aren’t ‘in Kansas anymore.’ The seemingly unstoppable upside momentum investors and traders enjoyed throughout all of last year — has finally been broken in 2018. The low volatility of 2017, also seems a distant memory. And, the love affair that investors and traders had with the social media and FANG stocks (FaceBook, Apple, Netflix, & Google), — well……..let’s just say the bloom is off the rose. As Vito Racanelli wrote in this weekend’s (April 2, 2018) Barron’s, “tech giveth, and tech taketh away.”
While the indices mostly ended the first quarter in the red, stocks did finish the holiday-shortened trading week in the green — just under two percent. Mr. Racanelli noted that “a late rebound in tech shares, put the market in the green for the week.” Having written that, Mr. Racanelli adds that FaceBook (ticker: FB), is down 16 percent from the broad market’s all-time high on January 26; while Google parent Alphabet (GOOGL) is down 13 percent.” Overall he notes, “the market is down 8 percent from it’s January 26 high — and, went into correction phase — commonly accepted as an 8 percent drop — on February 8.”
Randall W. Forsyth, writing in this weekend’s Barron’s, “The Fangs Bite Back,” noted “it’s also telling that a chart of FANG stocks shows Alphabet and FaceBook have trailed NetFlix (NFLX) — the top performer in the NASDAQ 100, with a 53.9 percent surge in the first quarter — and, Amazon.com (AMZN), since the turn of the year.”
For the year: the DOW is down 2.5 percent at 24,103 points; while the S&P 500 is off 1.22 percent at 2,641 points; and, the NASDAQ is hanging onto a year-to-date gain of 2.32 percent, and 7,063 points.
Meanwhile, Cocoa and steel led a commodities charge in the first quarter of 2018. Global growth and a weaker U.S. dollar, helped the commodities sector to eek out a gain. “The surge in demand has put an end to the ‘Great Commodity Bear Market that began in 2011,” said Sal Gilbertie, President, and Chief Investment Officer at Teucrium Trading. Myra P. Saefong, writing in this weekend’s Barron’s, noted that “the S&P GSCI Index, which tracks 24 commodities, rose 1.7 percent through [last] Wednesday. Steel prices, based on the S&P Global Platts’ data for U.S. made hot-rolled steel coil, jumped 33 percent in the first quarter — through last Wednesday.” “Steel demand has been strong; and, has been running ahead of supply, and the three key consuming sectors of steel demand-construction, automotive, and energy — are doing well,” said Joseph Innace, S&P Global Platts’ Editorial Director for Metals in the Americas.
“Cocoa however,” Ms. Saefong wrote, “scored the most impressive quarterly gain, with futures up 35 percent. Production issues in West Africa fueled the rise.” Left unsaid by Ms. Saefong is whether or not these production issues are temporary or are expected to persist throughout the year. It would be helpful/useful to know that answer.
The biggest commodities losers were “coal and natural gas, which fell 31 percent and 9 percent respectively,” Ms. Saefong wrote. “Natural gas took a hit from high U.S. production,” said James Williams, Energy Economist at WTRG, and “a lower price for natural gas, in turn — weighed on coal demand,” Ms. Saefong added. Meanwhile, “Sugar prices saw a 17 percent drop in the first quarter, pressured by increasing supplies from India,” according to Andrew Hecht, host of The Commodities Hour on radio station network, TFNN. Mr. Hecht told Barron’s that future prices “have been making lower lows since October 2016; and, are closing in on the August 2015 low,” of $10.13 per pound, viewed as a critical support level, Ms. Saefong wrote.
“Iron ore has dropped 16 percent so far this year, based on the S&P Global Platts’ IODEX prices for 62 percent-iron fines (quality iron-ore gains) delivered to China amid “environmental factors and steel production constraints in China,” Mr. Innace added. “But, if warmer weather comes to China soon, that will boost construction — driving steel demand up, and supporting iron ore,” Ms. Saefong wrote.
“Looking ahead, commodities face some complex challenges,” Ms. Saefong wrote. “Softening of global economic data seems to imply demand growth could be somewhat disappointing for commodities, and limit price gains,” said Rob Haworth, Senior Investment Strategist at U.S. Bank Wealth Management. There’s also the “risk of expansion of the U.S./China trade sanctions, which could limit global trade and growth,” he added.
What Lies Ahead For Stocks In April? And, What Tends To Occur For Stocks In Mid-Term Election Years?
My own guess, for what that’s worth, is that this first week of April, is likely to be muted. Spring break is still underway, and many traders, investors, families. etc., are still away or somewhat ‘disconnected’ this week. And I would guess most traders and investors will await next week’s beginning of S&P 500 Q1 earnings and 2nd Qtr./beyond forecasts — and see if the corporate tax cuts are going to juice the outlook on corporate bottom lines.
As for the month of April? Mr. Forsyth wrote that “it is comforting to know that April isn’t the cruelest the month,” for investors. “The DOW has averaged a 1.9 percent gain since 1950, the best showing of any month [since 1950], ” according to the Stock Traders Almanac. “During that stretch,” Mr. Forsyth wrote, “there were 46 positive Aprils, and 22 negative ones.”
“The first half of April tends to be positive, perhaps in anticipation of strong, first-quarter earnings,” the publication speculated; “although, the DOW is prone to weakness in the second half [of the month], following mid-March income tax payments.”
“April’s in mid-term election years tend to be less favorable however, with an average gain of just 0.8 percent in the DOW,” Mr. Forsyth wrote. “More importantly,” he adds, “April ends the strongest six month span of the year [for stocks] — ahead of the hoary….”Sell In May And Go Away,” indicator.
“Say what you will,” Mr. Forsyth noted, “the Stock Traders Almanac found that the DOW had returned an average of 7.6 percent between November 1 and April 30, going back to 1950 — compared with just 0.4 percent between May 1 and October 31. The tendency for weakness in the middle of the [a] mid-term election years is even more pronounced. The second and third quarters have been the weakest of the four-year-cycle, with an average decline of 1.8 percent in the DOW industrials.”
“That historically sets up for the “sweet spot,” of the four-year election-cycle,” Mr. Forsyth noted. “From the fourth quarter of a mid-term election year, to the second quarter of the [following] pre-election [POTUS election] year — THE DOW HAS AVERAGED A 20.4 PERCENT GAIN.”
“Whether the past will prove to be prologue for this unique political scenario [we find ourselves in] is another question [wildcard],” Mr. Forsyth observed. “So many of the fiscal goodies that tend to drive the election cycle have been served up early, which helped the major indexes earlier this year.”
“Then, there’s the Fed,” Mr. Forsyth concludes, “which is on track for another two, and maybe three — quarter point interest-rate increases this year. The Treasury market is reacting anomalously, with longer yields coming down again. The yield curve, expressed in the spread between the two, and ten-year notes, has fallen less than a percentage point. That’s made it the flattest since the financial crisis. The history of the yield curve suggests caution.”
‘Cannabis Producers Want To Make Canada The Silicon Valley Of Pot. Time To Weed Out The Hype’
The cover page, and feature article in this weekend’s Barron’s is by Bill Alpert, and focuses on the burgeoning pot industry, especially in Canada; and, attempts to separate the wheat from the chaff, and ‘weed out the hype’ surrounding the various marijuana-related stocks. This is a lengthy article, with lots of good information; and, I refer you to this weekend’s Barron’s for the full article. I will try and cover the key points and hopefully….some takeaways.
Mr. Alpert visited Canada to get a first-hand, on-the-ground look at what Canada hopes will become “the Silicon Valley of pot.” He begins in Smith Falls, Ontario, about an hour south of Ottawa. Smith Falls, is home to the largest cannabis company in the world, Canopy Growth (ticker: WEED.Canada). Canopy is preparing for the expected legalization of recreational cannabis this year  in Canada — the first industrialized nation to do so at the federal level,” he wrote. There is a burgeoning,robust, ‘pot-rush’ if you will, as companies attempt to posture themselves to hopefully cash in.
“Canada’s experiment is being closely watched by other countries, including the U.S., where federal law still classifies marijuana as an illegal narcotic; but, where more than half of the states allow prescription sales, and nine have legalized recreational use,” Mr. Alpert noted. “The visitor log at Canopy’s Smith Falls’s facility — shows delegations from dozens of countries,” eager to learn best practices in Canada’s nascent marijuana industry. One ‘problem,’ as with any ‘gold-rush,’ there are a host of upstarts, pretenders, and diamonds in the rough. Mr. Alpert and Barron’s — attempted to ‘weed out the hype,’ and make some observations useful to those considering making some of the pot companies part of their investment portfolios.
Not surprisingly, Mr. Alpert found that Canada’s pot companies are in a [Bitcoin-like] bubble,” which has resulted in a melt-up in the share prices of these same companies — and, “a collective stock-market value above $30 billion. That’s already about half the market capitalization of Canada’s gold mining industry.”
“But, Canada’s weed glut is a real risk,” for investors, Mr. Alpert warned.
“Along with Canopy, Canada is home to three other leaders in cannabis, all with sprawling greenhouses or high-tech grow houses like those in Smith Falls,” Mr. Alpert wrote. They are: Aurora Cannabis (ACB.Canada); Aphira (APH.Canada); and, MedReleaf (LEAF.Canada).
“Vivien Azer of Cowen & Co., is the only analyst on Wall Street who covers cannabis stocks,” Mr. Alpert noted. “After seeing Colorado’s legal cannabis dispensaries, she put out buy recommendations for Canopy and MedReleaf,” Mr. Alpert wrote. “A longtime analyst of the beverage industry, Ms. Azer thinks that legalized cannabis could eventually substitute for much of alcohol’s role as a “social lubricant.”
“Still,” Mr. Alpert notes, “the price of Canada’s marijuana stocks might trigger vertigo. The companies trade for more than 100 times their 2017 sales; and, several hundred times last year’s cash flows. Some have market values that are larger than estimated sales for Canada’s entire recreational marijuana market.”
Mr. Alpert also points out that “most predictions fail to consider the dizzying price drops registered in states like Colorado and Washington after they legalized pot. In both states, the supply glut pushed cannabis prices down more than 10 percent in each of the past two years.”
Not Everyone Agrees With Mr. Alpert’s Less Than Ringing Endorsement For Canada’s Burgeoning Weed Industry/Stocks
As you might expect, not everyone agrees with Mr. Alpert’s less than ringing endorsement for Canada’s weed stocks. “One analyst who has studied,” Canada’s cannabis industry, Daniel Pearlstein of Eight Capital, a tiny Toronto-based brokerage firm, is BULLISH on Canada’s marijuana stocks; and, is “convinced that cannabis presents investors with a once-in-a-lifetime opportunity — that will boom like the Internet.” Sort of the same kind of talk with respect to Bitcoin and blockchain technology.
“This market is simply way bigger than a lot of people believe,” Mr. Pearlstein told Barron’s. “How big? About $9 billion a year,” Mr. Pearlstein estimates.
The bottom line to Mr. Alpert’s article is buyer beware; and, he suggests that investors who want to get an investment footprint in Canada’s burgeoning marijuana industry — take a cautious approach and let the dust settle a bit before taking the plunge. His argument is that these stocks are already in the stratosphere, and there is likely to be a better buying opportunity down the road. If you do decide to take the plunge now — it may be wise not to get too speculative/greedy, and leverage in — in small increments, until you build the position you desire.
All for now. Happy Easter. V/R, RCP, www.fortunascorner.com