This Week in Barrons – 11-17-2013
A Fed Insider "Fesses-Up"
On Monday evening at 7pm, Andrew Huszar posted an op-ed piece for the Wall Street Journal (“Confessions of a Quantitative Easer”) that had everyone buzzing on Tuesday. Mr. Huszar was a Federal Reserve employee that left the Fed to work in the private sector. He left because (in his opinion) the Fed was becoming more and more beholden to Wall Street. But suddenly the Fed called him in early 2009, and asked him to come back. The reason? The Fed was launching the first waves of Quantitative Easing (QE), and needed someone to actually do the bond buying. Mr. Huszar’s job would be to buy up over a Trillion dollars worth of mortgage bonds in 12 months.
According to Mr. Huszar, the Fed was barreling headfirst into the largest financial stimulus in the history of the US. But, as his year of buying up mortgage bonds ended, he had come to the conclusion that while the banks were raking in unprecedented profits – Main Street was getting virtually none of the benefits. In one part of the op-ed, he apologized to the U.S. taxpayer, saying he helped Wall Street make billions, and did it with YOUR money. He went on to say that the program is a failure. It only serves its Wall Street masters, and the Fed is not the independent organization that they say they are.
The reason I found the article so important is that he lays out exactly the things I've been preaching about for so many years. The Federal Reserve has distorted the economy in ways that we've never seen before. They've boxed themselves into a very tight corner. If they continue to pump money into the system, it will continue to flow to the banksters. The banksters will push it into risk assets like stocks, and that creates the bubble that we’re seeing now. Only a very small portion (of the overall amount of money spent) will actually create any true economic activity.
If they try and remove this QE from the system, stocks will crash, and what little economic activity we have, will grind to a halt. We have the proof. Simply look at what happened to housing sales when rates spiked from 2 to 2.7%. Sales fell off a cliff. If The Ben Bernanke stops suppressing interest rates, and they potentially run to 4% - we implode not only the housing market, but also the U.S. economy.
Therefore, the U.S. has a dilemma. In saving the ‘Too Big to Fail’ banks, the Fed has printed over $3 Trillion dollars (out of thin air), and pushed it to these banksters. While the banksters are happy (and have all the money they need), the J. Q. Publics on Main Street continue to see their lifestyles erode. Currently, a record 91 million people are not in the workforce. And honestly, even if some of those 91 million are on disability or some other government program, they are not living the type of life they would have had if they had a good job with benefits.
I'm on record as saying that the Fed will NOT taper, and the next move may very well be MORE stimulus. Ms. Janet Yellen (the heir to The Ben Bernanke throne) thinks doing more is better than doing less. Ms. Yellen might just roll the dice and expand the amount of their QE process. More stimulus would send stocks soaring even higher, all the while barely moving the needle of true economic activity. You cannot fix a broken economy with monetary stimulus. That fix must be accomplished at the fundamental level.
To build an economy, you need to build an atmosphere of cooperation starting with the foundation. That means the elimination of ‘Over the Top’ regulations. One of the main reasons so many jobs fled to foreign countries was our excessive regulation. Before you can put a shovel in the ground to build a plant, you need to do 5 years of impact studies on the wooly moth (for example). While this is great for the wooly moth, it doesn't help the businessman who’s ready to build his plant, and put people back to work.
Unfortunately, it’s not an accident that we have so many layers of red tape, rules and regulations. Often politicians see businesses going under as a victory. They get to claim a reduced ‘carbon footprint’, and get to put those former employees onto Government programs. Therefore, we are stuck with financial engineering by the Fed as being the building block for our economy, and that is doomed to failure. The Fed either prints and increases the size of the stimulus programs, or takes the punchbowl away. Those are the only two choices. We continue to print, and watch a very small, select group benefit wildly, while the masses see no relief. Or we take the printing away, and as we try to adjust to something more ‘normal’ – the economy will lock-up and crash.
Andrew Huszar’s article was good, and proved our point. Yet even with his admission of the QE program being a failure, the QE program continues because they have no choice.
Early in the week the ‘Taper Tantrum’ hit the market. The Fed was sending their henchmen out to play ‘good cop / bad cop’. A few would talk about QE remaining, while others spoke of tapering in December. They obviously did this to keep the market from just running straight up every single day. The FED has said on numerous occasions that any taper is data dependent. In other words, the data must be strong enough in order to reduce the amount of QE, so as to not affect the economy. Well:
- Housing sales fell 1.8% last month, with mortgage applications falling as well. Tapering will just cause interest rates to rise – so let’s assume that’s not a good thing for housing.
- Wal-Mart (the single largest retailer on the planet) said that things look lousy out there – and reported falling short of their revenue estimates by a Billion dollars.
- Cisco (CSCO) a very large tech company, not only missed their earnings and revenue projections but is calling for a 10% reduction in sales going forward – as markets are ‘very soft’. And when CSCO says that the technology markets of the world are lousy – they really mean it.
Then Ms. Janet Yellen took the stand for her confirmation hearing. The market went from ‘down’ to ‘up’ in a heartbeat. It appears that the new Fed head will (most likely) be even more ‘accommodative’ with money printing than The Ben Bernanke. If it weren’t so terribly sad, it would be funny. The market is only going up because of QE, and Ms. Yellen won't stop it.
We’re currently putting together a string of all-time highs. It is becoming fairly routine. But as long as the printing presses keep running, they'll keep jamming that money into the stock market. Why not? It's free money. Therefore, I continue to lean long and ‘hold my nose’. Yes, it stinks but the market is up and I’ll take it.
Well, the secret is out of the bag. I feel vindicated and violated by CNBC’s Fast Money / Fast Options show on Friday evening. While they were discussing Twitter (TWTR) – one of the traders suggested that the ONLY way to play this stock (and many stocks at these levels) was to buy the stock, and then purchase the corresponding ‘at the money’ call option. In the case of Twitter – he pointed out that with the stock selling at: $43.98 – buying the $44 call option guarantees you $1.25 cents per WEEK. This is a 3% return for the WEEK. So, it appears that the proverbial ‘cat is out of the bag’. Let’s see how Monday’s ‘covered call’ action plays out.
Looking around I still like:
- WLT and ACI – especially with their corresponding ‘covered call’ options,
- The 3D printer space is going crazy – so stocks like SSYS / DDD / PRLB / XONE are all worth a 2nd look.
- CSIQ and XONE both had non-spectacular earnings this week – and both moved higher on the news (go figure).
- I still like GILD in healthcare, BTU (Peabody Energy) and POT (Potash).
- AND – I like Twitter (TWRT) – but ONLY with the covered calls paying almost 3% per week!
My current short-term holds are:
- TGT in at 66.20 (currently 66.97) – stop at entry,
- TSO in at 50.56 (currently 54.71) – stop at 54.40,
- MOS in at 47.54 (currently 49.05) – stop at 48.50,
- CLF – in at 25.53 (currently 27.75) – stop at 26.50
- SIL – in at 24.51 (currently 12.28) – no stop
- GLD (ETF for Gold) – in at 158.28, (currently 124.48) – no stop ($1,287.30 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 20.05) – no stop ($20.71 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, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting: <> .
Please write to Mr. Culbertson at: <firstname.lastname@example.org> to inform him 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 his thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is the 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.