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Market Sees Problems Ahead for General Electric – GE

General Electric Co. shares plummeted after two Wall Street analysts sounded more alarm bells around the company’s liquidity, and a report said former General Electric employees were being questioned by federal investigators about its troubled insurance business.

Deutsche Bank slashed its GE price target to $7 a share on Friday, saying revenue for the conglomerate’s struggling power business “remains flattish but does not continue to decline.”

“We think the key debates can be boiled down to the trajectory of GE Industrial [free cash flow] and whether the company is headed for a liquidity crisis,” Deutsche Bank analyst Nicole DeBlase said in a note to investors. The firm’s base case assumes “an economic downturn does not happen” through the end of 2021, DeBlase said.

Even in Deutsche Bank’s bear case, DeBlase said the firm does “not forsee a liquidity crisis.”

The other blow came as the Wall Street Journal reported that several former General Electric employees have said the company’s insurance business failed to internally acknowledge worsening results over the years. The employees also said that they were interviewed by government lawyers.

Shares were down 5.8 percent at 9:54 a.m. in New York, after dropping as much as 6.4 percent earlier in the session. The stock has remained below $8.00 per share over the past two weeks, a level it last saw in March 2009 at the financial crisis market bottom.

General Electric’s 4.418% notes due in 2035, issued out of the GE Capital entity, also fell this morning and now trade at a spread of about 286 basis points above Treasuries, 12 basis points wider than where the bonds closed yesterday. The notes are the most active in the investment-grade bond market today.

Structured Notes Linked to FANG and Technology Are in Deep Trouble

Main street investors who have purchased FANG or other technology related structured notes face a stark reality check.

With banks selling $2 billion of structured products linked to one or more of the now-struggling FANG members this year alone, investors are getting schooled on the risks lurking in complex debt securities — even those laden with protective buffers.

They’ve already missed out on coupon payments and unless this month’s $2 trillion U.S. equity rout reverses course, investors face haircuts and more lost income.

The hardest hit are structured securities tied to Nvidia Corp., with $221 million linked to the chipmaker sold globally this year alone. The timing couldn’t be worse: the stock is worth about half as much as it was at the start of last month after disappointing forecasts.  Nvidia’s trading below the threshold required to receive the touted 11 percent return per year.

Citigroup sold $7.34 million of structured notes tied to Netflix in June when the shares were rocketing toward an all-time high. The six-month securities pay an annualized coupon of 13.75 percent as long as the streaming service remains above $308.32.

With the stock trading below the $308.32 price investors would have received no coupon this month and risk losing at least a quarter of their principal when the notes mature on Dec. 28 — unless Netflix stages a rally to the tune of 20 percent.

Holders of notes issued by Goldman Sachs Group Inc. that are linked to Facebook Inc., Amazon.com Inc. and Netflix also stand to forgo coupons unless there’s a robust equity rebound by January.

All the same, the missed payments highlight how the tech blow-out is reverberating beyond the equity market, with a rising count of potential victims.

Investors Selling FANG Stocks As Technology Losses Grow

On November 20, 2018, an article in the New York Times (“The Tech Stock Fall Lost These 5 Companies $800 Billion in Market Value”) noted that “Wall Street’s turn against big tech is adding up” and that “as investors have dumped shares of Facebook, Amazon, Apple, Netflix, and Google-parent Alphabet, $822 billion in value has been wiped off their combined market value since the end of August.”

This article further noted that “based on the losses from each company’s high point in recent months, more than $1 trillion in value has been erased. Facebook, Apple and Amazon have endured the greatest declines, all down $250 billion or more from their respective peaks.”

In fact, “by the end of August, the market value of Apple and Amazon had each surpassed $1 trillion, and Alphabet was flirting with $900 billion. The combined market value of the five had reached $3.6 trillion.”

Clearly, “worries about global economic growth as well as lackluster earnings and outlooks the past two quarters have shaken investors’ confidence” in these stocks and “has investors questioning whether the values of these big tech companies have become too lofty.”

“Of course, Facebook, Amazon, Apple, Netflix, and Alphabet have faced steep sell-offs before, only to bounce back quickly. Just this year, the combined market value of those five companies has tumbled 7 percent or more during three separate periods. In each instance, the stocks resumed their march to fresh highs within weeks.”

Whether this time will be different – especially for those investors who have purchased these stocks on margin or have purchased other securities that are tied to the performance of these technology shares – is clearly the question of the day.

If you are an individual or institutional investor who has any concerns about your technology investments or margin account with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Crude Oil Price Volatility Continues

Oil markets are entering an unprecedented period of uncertainty due to geopolitical instability and a fragile global economy, the head of the International Energy Agency (“IEA”) said on Tuesday.

The IEA was founded in 1974 to help countries co-ordinate a collective response to major disruptions in the supply of oil. The IEA examines energy issues including oil, gas and coal supply and demand, renewable energy technologies, electricity markets, energy efficiency, access to energy, demand side management and much more.

OPEC is advocating for an oil supply reduction of 1 million to 1.4 million barrels per day to prevent and correct crashing oil prices similar to what transpired in 2014.

Another factor contributing to the fall of oil prices is the restoration of sanctions by the United States to Iran earlier this month cutting the country’s crude exports by close to a million barrels per day.  The United States said it sanctioned six individuals and three entities to disrupt an Iranian-Russian network that it said was providing millions of barrels of oil to the Syrian government and funding militant groups Hamas and Hezbollah.

U.S. officials said Russia facilitated the delivery of oil from Iran to Syria, and that a variety of mechanisms were used in an attempt to conceal the shipments and oil-related payments.

Today Brent oil is currently trading around $62 a barrel.

FANG leads the markets lower, nearly $1 Trillion in FANG market cap lost

Stocks veered into deep early losses Tuesday, as leading tech stocks plummeted and the Dow Jones industrial average cut deep below the 25,000 mark.

The Dow Jones industrial average undercut its 50-day line of support on Monday, ending the session flush at the 25,000 mark. A slip below that mark would leave the index ready for another, lower test, at the level of its Oct. 29 low. The Nasdaq ended the session 1.5% above its Oct. 29 low. The S&P 500 was in somewhat stronger position, holding 1.8% off its October low. The S&P 500 is 4% below its 50-day moving average. The Nasdaq was 8% below that line of support, and 13.5% off its August peak.

Apple stock opened down 3.5%. As of Tuesday, Apple constituted a bit more than 5% of the weight of the Dow Jones industrial average, placing it at sixth on the list. It ranks first among weightings on the Nasdaq 100 list, at slightly more than 11% of the index. Apple shares are now nearing a free-fall, working on their eighth straight down week, well below their 40-week moving average and down more than 20% from a Oct. 3 high. The last time Apple shares fell more than 20% was in April-May of 2016.

Among so-called FANG stocks, Netflix and Amazon.com led the retreat, down 3.4% and 2.7%, respectively.

GE’S Free Fall May Be A Sign of a Broad Corporate Debt Problem

Over the past decade, the Fed has kept interest rates at historically low levels.  These low interest rates have incentivized U.S. Companies to borrow, adding significant debt to their balance sheets.  As reported by the Wall Street Journal, the gap between investment-grade U.S. corporate bonds and U.S. Treasuries has reached its highest level in two years.  Similarly, the spread between junk-rated bonds and U.S. Treasuries have hit a 19 month high.

Meantime, General Electric Co. (GE), once considered the bluest of blue chip stocks with an immaculate credit history, may now be the poster-child for over-borrowing.  The stock, which traded at roughly $30 per share two years ago, is now under $8 per share.  Its bonds are approaching junk territory, with S&P downgrading its debt in October from A to BBB+.  If GE debt falls to junk levels, it would make up one-tenth of $1.2 trillion bond market according to data from Fitch Ratings.

GE’s free fall has led market experts to eye other companies with significant debt that may be exposed problems similar to those GE faces.  Indeed, if GE’s debt issues are indicative of a broader corporate over-borrowing problem, it could spell trouble for the economy moving forward.

Margin Accounts Danger Highlighted By Recent Market Volatility

In an Investor Alert that was issued on November 8, 2018 (“Know What Triggers a Margin Call”), the Financial Industry Regulatory Authority (“FINRA”) warned investors that “volatility is back, and market swings can sometimes bring an uncomfortable surprise to investors – a margin call.”

When an investor purchases stock on margin, the investor’s brokerage firm is lending the investor cash, using assets in the investor’s account as collateral, which is then used to purchase securities.

In order to trade on margin, an investor must have a margin account with his or her brokerage firm. As noted by FINRA, “there is a difference between a margin account and a cash account. In a cash account, all transactions must be made with available cash, while a margin account allows you to borrow against the value of the assets in your account to purchase securities.”

While using margin increases an investor’s purchasing power, FINRA notes that “there’s a flip side to buying with borrowed funds. Not only do you pay interest on the money you borrow, but buying on margin leaves you open to the potential for larger losses. In fact, you can even lose more money than you invested.”

If the securities an investor is using as collateral go down in price, the brokerage firm can issue a margin call. This is a demand that you repay all or part of the loan with cash, a deposit of securities from outside your account, or by selling securities in your account.

If an investor fails to make the required deposit, and the firm does not grant an extension to do so, the firm is required to liquidate the shares that were purchased on margin, or can liquidate other assets that were put up with the firm as collateral.

And FINRA notes an important reality check: a firm is not required to notify an investor of the sale, though most do so as a courtesy, nor does the firm let the investor choose which securities or assets are sold to meet a margin call.

With the recent volatility in many sectors of the market – especially in many technology and energy-related individual stocks – investors’ portfolios have been exposed to the potential danger that can be associated with a margin account. In fact, as of month-end September 2018, the amount of margin debit balances in customer accounts exceeded the monthly margin debit balances that were reported for each month in calendar year 2017.

Clearly a margin account and the attendant dangers associated with the same are not appropriate for every investor – especially for those who do not understand or want to assume the unlimited risks that are associated with them in an extremely volatile environment.

If you are an individual or institutional investor who has any concerns about your investments or margin account with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Recent Fall in Oil Prices May Preview an Energy Bear Market

With the recent plummeting of oil prices, the $64,000 question is asked again-is it a greater supply or a weakening of demand that has caused lower oil prices.

As always, there are views to support both sides and most likely is a combination of an increase in supply and a diminish of demand. There are competing views to what extent oil prices are most susceptible to a change in demand versus a change in supply.

Beginning in the summer of 2018, production for oil supply had increased greatly. While production in Iran and Venezuela decreased, the United States, Russia and the Levant compensated for shortfalls throughout the world. Countries in the Middle East, specifically Saudi Arabia, increased oil supply, more than outweighing restrictions and sanctions imposed on Iran.   However, while the International Energy Agency made a call to arms for greater production of oil, it is China’s looming recession that has contributed to the fall of oil prices. China is currently importing over 8 million barrels a day of crude oil which is a significant increase from 2004 when it imported a little bit over 2 million barrels a day.

2014-2015 was the last time the price of oil plummeted. It is not a coincidence during that time the Chinese economy decelerated while the United States oil production blossomed with the shale boom. One factor China must face is its credit issue. Its economy has been slowing down over the years, but while its economy thrived it was based on debt. Now with the slowdown in its economy and of massive amount of debt, this only increases worries among economists about China’s imports and whether they could maintain the same level as in previous years.

There has always been a correlation between the London Metals Exchange Index and the price of crude oil. Industrial metals and oil prices have historically corresponded to major economic transitions. The London Metals Exchange Index has been in decline since June of this year.

The knee-jerk response to falling prices has been to cut back on the supply. However, this has not worked in the past, especially dealing with OPEC countries. Individual countries cannot resist trying to sell more volume of oil than other countries, albeit at lower prices. Many times, countries establish and strengthen overall importing and exporting ties with other countries, which far outpaces advancements in a single commodity.

At the end of the day, regardless whether oil prices dropped due to greater supply or lack of demand, this may be the catalyst of a tremendous bear market on the horizon.

FANG Leads the Markets Lower, $2 Trillion Lost by Stock Markets In October

October ended as one of the worst months since the 2008 financial crisis.  The S&P 500 lost $1.91 trillion in October. Losses were spread widely across industry sectors. October was the worst month for the S&P 500 since September 2011.

Federal Reserve Chairman Jerome Powell said the central bank is “a long way” from neutral interest rates. Powell said the Fed does not need the policies put in place that pulled the economy out of the last financial crisis. He declared that “we don’t need” the “really extremely accommodative low interest rates” the central bank put in place a decade ago. The Fed is likely to raise the federal funds rate to 3.4 percent before pausing, according to the most recent projections.

Big technology stocks — most well-known as FANG —FacebookAmazonNetflix and Google parent Alphabet — were among the hardest hit. Amazon ended the month down 20.2 percent, and Netflix ended down 19.3 percent. Investors fled both after earnings reports. Facebook and Alphabet finished October down 7.7 percent and 9.7 percent, respectively.

FANG has lost $300 billion in market value since mid-September this year.  The Dow Jones Industrial Average closed down 13 days in October.

Auto-Callable Structured Products – the Wall Street House Always Seems to Win

The Wall Street Journal, on September 12, 2018 (“FANG Stock Play Can Fall Short”), noted that investors looking to reap the gains of highflying technology stocks while avoiding risk – through the purchase of “auto-callable” structured note products – are finding they can’t do both.

These structured notes “are often sold to mom-and-pop investors seeking higher-yielding alternatives to government debt, which is reliably safe. Offering documents say that buyers can earn fixed payouts of as much as 25% of the purchase price annually without taking on the risk of outright common-share ownership. Yet many of these FANG-linked notes fail to produce returns anywhere near that stated range, according to an analysis of securities filings by The Wall Street Journal. Many times, the upfront fees that banks collected were higher than the total returns earned by investors.”

“That is partly because the notes – dubbed ‘auto-callable’ because a rise in the stock price contractually triggers their redemption – are often redeemed in less than a year, and sometimes in as little as a month. In many cases, the auto-callable provision leads investors to earn scant returns and receive their money back long before the stated term of the investment.”

As noted in the article, auto-callable notes “are unlike common shares, which offer purchasers unlimited potential gains as well as the risk of total loss. They are also unlike U.S. Treasuries, which pay out periodic ‘coupons’ and entitle holders to full repayment at maturity. Instead, the notes offer gains up to a certain, specified threshold and protect against only certain, specified equity losses. Typically, if the linked stock or basket of stocks trades below a designated barrier – say, 75% of its initial value – when the notes mature, investors can lose a share of their principal on par with losses on the stock or basket.”

The Wall Street Journal specifically notes that Citigroup Inc., UBS Group AG and Royal Bank of Canada are among the banks this year that have issued more than $1 billion of auto-callable structured notes that are linked to one or more of the four FANG stocks: Facebook, Amazon, Netflix and Google parent Alphabet.

So how does the Wall Street house win with these investments? Consider just the following 2 examples that were cited in this article:

“When Citigroup sold $16.3 million of auto-callable notes tied to Amazon.com shares in mid-February, the firm advertised a 10% potential annual coupon for three years. Three months later, Amazon shares were up more than 20% – but the note was called, meaning that investors who purchased it received a total payout of 2.5%” while Citigroup “collected 3.5% in fees.”

Similarly, “in March, UBS issued a $150,000 note tied to Netflix. It paid 20.58% annually as long as shares of Netflix weren’t above the effective purchase price on monthly review dates. After one month, the stock was up 5.9%. The note was called, paying a coupon of 1.7% of the purchase price” while UBS reportedly “collected 2.7% in fees.”

If you are an individual or institutional investor who has any concerns about your auto-callable or structured product investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).


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