This Week in Barrons – 5-26-2013
What’s The Fed got to do with it?
First off - I want to wish all of you a very wonderful Memorial Day holiday. I hope you spend it with friends, family, some good food and drink, and remember those that sacrificed so that we can celebrate.
I received an email the other evening: ”You say that the market gains are all because of Federal Reserve money, but I've been reading that Companies are so flush with cash that they're buying back their own stock and pushing prices higher. So what's the Fed have to do with it?”
There are many ways that Federal Reserve funds make their way into stock prices. Currently The Ben Bernanke is printing $85 Billion a month, and using it to buy up Treasuries and Mortgaged Backed Securities (MBS’s). By being the buyer of last resort, they have driven interest rates to virtually zero. Buying up MBS’s does a couple of things:
- First, it lets banks off the hook. A large portion of the big meltdown was because banks got caught with junk mortgages. So, one of The Ben Bernanke's first jobs in 2009 was to relieve the poor banks from all those trashy MBS's. But, not only did the Fed buy them (freeing the banks from deadbeat borrowers), they bought them at “par”. In other words, because there were so many garbage loans, an entire purchase may have been worth 39 cents on the dollar, but the Fed gave the banks the entire dollar.
- Secondly, when The Ben Bernanke buys Treasuries (at $45B / month) it reduces interest rates. It also hands money over to the primary dealer banks. You see, Benji just doesn’t walk down the hall in DC and buy Treasuries from the Treasury Secretary. If he did that, the banks wouldn’t get their cut. He buys them thru the 18 Primary dealer banks so that they get their ‘processing fees.’
On one hand we have the banking system taking in massive amounts of Fed cash, with no place to put it – so they play cowboy in the market. And on the other hand (due to the insanely artificially low interest rates) companies have realized they have the perfect Ponzi scam to buy-back their own stock.
The market runs on ‘Earnings per Share’ (EPS). Assuming you’ve increased your profits / earnings as far as you can – the only way remaining to increase ‘earnings per share’ is to reduce the denominator – reduce the number of shares outstanding. Back in 2007, companies went on a buy back binge like never before – trying to keep the 2005 - 2007 market rally alive. Now (in 2013) they are trying to exceed that buy-back binge. This year, big U.S. companies have given the go-ahead for $286 billion of buy-backs, up 88% from the same period last year. Currently, U.S. companies (not counting banks and financial firms) have bought-back more than $1 trillion of stock in the five years through 2012.
So companies are increasing their EPS by buying back stock and therefore making the denominator (the float) smaller. However, there is a catch. Companies are BORROWING the money to do it. Why are corporations borrowing the money – because interest rates are virtually at zero! So if Corporations couldn't borrow money for free, they wouldn't be buying back stock. On top of that, the Fed's ZIRP (Zero Interest Rate Policy) has allowed corporations to sell their own corporate bonds (for a couple percent higher than treasuries) and take the proceeds and buy-back even more stock. Virtually all of the corporations announcing buy-backs are not using corporate savings to buy-back stock, they're issuing debt. Corporations are not expanding, not hiring, not re-tooling – they are buying back stock (to the tune of $3B/day) to goose their EPS.
None of this insanity could happen without the Fed pushing a trillion dollars a year into the system. Corporations couldn’t be offering buy-backs if interest rates were anywhere near normal (i.e. corporations wouldn’t want the risk of trying to pay out 7 or 8% interest on a couple billion dollars.) So, between handing the banks big bucks for MBS's and Treasuries, The Ben Bernanke's interest rate policy has pushed companies into playing the "Get it while it’s hot” game.
This is why just the rumor that the Fed may taper off the juice, sent the market into spasms of selling this week. Imagine what happens when it really hits? No more buy-backs. Banks will have non-performing loans again. Trading desks won’t have free money to play with. This is why The Ben Bernanke's so trapped in a box. If he stops this insanity, we crash. If he doesn't stop, the distortions become so huge, we implode from within.
Look at Japan. They've had to halt their bond market 9 times in the past week. The Yen injections are tossing their entire system into spasms, and it’s getting quite dangerous. The Central Bank currency wars are causing distortions that are not easily fixed. When Japan announced their big monetary push, their stock market gained 40% in just weeks. That is not normal. It feels like each day the distortions are bigger, and the feelings of panic grow stronger. So do the Boy Scout thing – Be Prepared.
Back in April ‘The Powers that Be’ arranged a massive hit on Gold. The bullion banks and the gold warehouses were critically short of inventory and needed to shake people out of their gold holdings. I said then – do NOT buy this dip, because if their first attempt didn't work they will do it again. Sure enough after the GLD bounced from a low of 130 on April 12th, it ran to 142.50. Then they stepped in again, and smacked it right in the face, sending it down from 142.50 on May 8th, to 130.88 on Monday.
Prior to Monday, for 7 sessions the GLD hovered around 142.50. Since then, we have received at least a dozen absolutely lousy economic reports, from the Philly Fed to the Durable Goods report. Logic dictates that due to strong demand, bad economic news, and global unrest the metals should have gone higher. But after consolidating for 7 sessions the metals went down, because the Central banks and Bullion banks wanted them to go down in order to increase physical selling.
Gold is currently being purchased by anyone with big bucks, and that includes the Central Banks, Bullion Banks, and people like George Soros. FYI: It was widely reported that George Soros sold his GLD shares (the ETF that ‘presumably’ tracks to the price of Gold). But Mr. Soros didn’t ‘sell’ his GLD shares like I would sell my GLD shares. Mr. Soros (the large player that he is) sold/redeemed his GLD shares for physical gold.
This attack on the metals will exhaust itself, and when it does I will be a buyer again. I feel the time is close, because the physical demand has increased during this latest pull down. Don't forget, with paper assets you can manipulate a market to conform to virtually any silly notion you want. But in the physical market, you need a live buyer for every seller. Currently, there are 4 buyers for every seller!
On Friday I ‘gambled’ and purchased a small amount of DIA calls. Why do I call it a ‘gamble’ rather than an investment? Because I did it for all the wrong reasons – none of which have anything to do with ‘logic’ and ‘investing’.
- The market has not experienced 3 consecutive down days this year.
- Fridays ahead of a 3-day weekend have been green 70% of the time. And on this Friday (although we opened down over 100 points) we finished a +8!
- And given we come back on Tuesday, we haven’t experienced a down Tuesday in 2013.
Having said that, we’ve been set up 11 times this year for what appeared to be a correction, and the market just pushed higher. One day that record will fall, and I think the fall will be fast and furious. So, while seeing the market run wild is fun, not many want to talk about what happens when it ends.
We made some trades this week, we sold out of:
- GS – in at 157.00 – sold @ 162.14
- UA – in at 60.19 – sold @ 64.20
- SBUX – in at 60.70 – sold @ 64.70
- NSC – in at 77.03 – sold @ 79.00
DS sent us a hint to watch CCJ going forward. Canada is the #2 supplier of uranium to the world, and the largest supplier in Canada is . It’s one of many companies that will ride the uranium bull. Cameco mines are responsible for about 14% of global uranium production. It owns mines in Canada, the United States and Kazakhstan – which collectively hold 465 million pounds of proven reserves.
My current short-term holds are:
- SIL – in at 24.51 (currently 13.40) – no stop yet
- GLD (ETF for Gold) – in at 158.28, (currently 134.16) – no stop ($1,386.80 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 21.60) – no stop ($22.48 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, RF Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting: <> .
Please write to <> to inform me of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <>.
If you'd like to view RF's actual stock trades - and see more of my thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is my handle.
If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Remember the Blog: <http://>
Until next week – be safe.