This Week in Barrons – 8-19-2012
“Something’s Coming – Something ?” … West Side Story
This is a line from the musical West Side Story that announces a big change coming. There is a certain uneasiness in the air, where people know “something” is coming and no one knows what. There’s something just not right going on out there:
- - In the past week the U.S. Treasury (via U.S. regulators) has directed five of the country's biggest banks (including Bank of America and Goldman Sachs) to develop plans for staving off collapse if they faced serious problems, emphasizing that the banks could not count on government help.
- - In an attempt to push stocks higher, we are seeing our Fed send dollars to Europe to support the Euro and weaken the dollar. These currency flows rose to $9.3 billion in the current week, the highest since December 9, 2009.
- - In the past week John Corzine - previously of MF Gobal (a company that literally stole hundreds of millions of dollars from customer’s accounts – a criminal offense) – instead of going to jail, pseudo-announced that he would like to launch a new hedge fund!
- - The unemployment rate in New Jersey rose to 9.8% - highest since 1977 – all the while unemployment claims in 44 of the 50 states are reaching new highs.
- - The price of ground beef hit a record high.
- - The Philadelphia Fed report came in negative (for growth) for the 5th month in a row, and the Empire State Fed report came in with a 13 point plunge to go negative.
- - Companies are beating earnings estimates by a penny on falling revenues.
- - Anxiety about stocks is running so deep that net deposits to bond funds thru July are already 50% greater than for all of last year!
- - And one of Joe Biden’s good friends received a $20M Federal Loan to open a luxury car dealership in the Ukraine!
Here are a couple headlines that fall into the: “You just can’t make this s__t up” category:
1. 1. The U.S. Department of Labor announced on Monday that it will be awarding almost $100 million in grant funding to states to prevent layoffs by allowing businesses to pay employees as part-time workers and the federal government will pick up the tab for the cost of a full-time paycheck.
2. 2. Finland is preparing to ‘batten down the hatches’ for a full-blown currency crisis as tensions in the Eurozone mount and has said it will not tolerate further bailout creep, or fiscal union by stealth.
3. 3. And finally – the world is warning us about ‘food inflation.’ Between the drought in the mid west, the possible closing of the Mississippi river for barges, and the way oil is rising again – when The Ben Bernanke does his next round of stimulus – food prices will soar with ground beef being just the tip of the iceberg.
While we see the stock market rise almost every day as they look forward to The Ben Bernanke's gifts of fiat dollars, I’m hoping the money we all see in gains will be enough to offset the inflation that we’re all going to feel. If you have the room, buy some food for storage. Not because the world will end today, but because food is going to cost more over the next several months. When the Government is telling banks to make survival plans, and when seemingly mellow Government agencies are buying untold millions of rounds of body damaging ammunitions – there’s something "up" and it's NOT GOOD.
The high S&P and DOW closes back in April, were 1419 and 13,279 respectively. On Friday the S&P closed at 1418, and the DOW closed at 13,275. They have pushed the market right to the 4-year highs – so what’s next?
The technical pattern that was developing suggested that the market would trade sideways and then inch itself higher, and that has indeed happened. Now all that is left is to see if we can close a couple days above the intra day highs at 1422 and 13,338 – which will get us into "breakout" mode. Can they pull that off? I think they can, but it won’t be easy. Retail investors have been pulling money out of the market, and the only reason we're inching higher is the destruction of the US dollar. The Ben Bernanke continues to prop up the Euro (so our dollar falls), and all of our hopes rest on The Ben Bernanke and Draghi pulling off a coordinated, gigantic round of "QE".
We are in overbought territory again – but as long as there's no bad news out of Europe, and as long as The Ben Bernanke's henchmen continue to tell us that something's coming, they will continue to inch us higher. But we are getting down to the nitty-gritty! The Jackson Hole Wyoming meeting is in two weeks. If (after the meeting) The Ben Bernanke doesn't announce something – the market will be sorely upset. Then on September 12, we have the German vote considering whether they can even join in on the ESM and the ECB bailout maneuver. So there are two inflection dates – the Jackson Hole meeting, and the German ruling.
What happens if we get positives out of both dates? Will the market "sell the news" having already run up on the rumor? In the case of QE, the market has made substantial gains after any announcement, and I would suspect that this would be no different. If The Ben Bernanke does some form of Mortgage Backed Securities (MBS) buying, and the Germans go along with Draghi, I suspect we pile on a lot of points. As long as Bernanke's willing to devalue the dollar, and help the Euro, we should see them try and threaten the old, all-time highs of DOW 14K.
We've been leaning long into this and so far it's the right thing to do, but it’s like walking on eggs. On any day someone in Europe could come out and say the whole plan is shot, and that would indeed knock 400 points off the DOW.
I believe that The Ben Bernanke will come out with something, and I believe the Germans are going to go along with Draghi. NOT because it's right, but because they have no choice – without the punchbowl, everything falls. It’s not about fixing anything; it’s all about living another day.
In terms of developing a strategy to protect yourself and profit from all of this, you might consider an option straddle. Also consider adding some VIXX to your portfolio, as volatility should increase if things don't unfold just right. This is one of those times when making the right decisions can indeed line your pockets.
Currently I have 22 stocks that are on my radar for possible purchase. I am not buying 22 stocks, but have 22 that are set up nicely and are worthy of a swing trade if indeed the market holds up. Some are cheap – like LSCC, which I just purchased. It had been struggling with the $4 level for months and I thought that if it crossed it again, it might go. Some are more expensive – like IBM, which I also purchased. It had been banging its head against $200, and when it made it through I took it. And some are mid-range like MMM. I liked the sideways shuffle it had done at the $92 level, and told my twitter followers that when it crossed $92.50 I’d buy it – and now it’s sitting at 94.24.
This is an exciting time. In the next couple weeks we will know a whole lot more, and I will probably be making changes to my asset allocation and cash positions along the way.
Currently I’m holding:
- SPY – in at 135.75 (currently 142.13) – stop at 141.00
- GDX – in at 42.50 (currently 45.32) – stop at 43.50
- PBR – in at 21.80 (currently 22.28) – stop at 22.00
- WRES in at 2.63 (currently 3.04) – stop at 2.80
- LSCC in at 3.80 (currently 4.10) – stop at 3.80
- WYNN in at 102.03 (currently 105.03) – stop at 104.09
- IBM in at 199.99 (currently 201.18) – stop at 200.60
- SNDK in at 42.51 (currently 42.53) – stop at 41.80
- MMM in at 92.53 (currently 94.12) – stop at 93.00
- GLD (ETF for Gold) – in at 158.28, (currently 156.66) – no stop ($1,616.30 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 27.23) – no stop ($27.99 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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