This Week in Barrons – 12-15-2013
Let’s Get Ready to Rummmmble…
This week it’s The Market versus ‘Benji and the Jets.’ On Wednesday (at approximately 2:15 pm) we will learn whether there will be a tapering of the QE program from $85 Billion per month to something less. The talking Feds have been out in force saying that there is a good chance that a taper is coming at their next two-day meeting in December. And just like in the summer (when they made a similar announcement) the market has fallen ahead of it.
This whole QE taper story is getting old. But, because the market does indeed move based upon it; therefore, I was wondering if a taper really made any sense.
- In retail, Wal-Mart continues to tell us that 2013 was one of the worst years in their history. Others (Costco, BestBuy, and Dick’s) including Mal-Mart have all missed their earnings estimates. Therefore, when middle-class retailers are seeing a weak consumer, is the Fed's work really done?
- In housing (when I listen to CNBC) I’d swear that there are bidding wars and fist fights as people are purchasing homes. Yet mortgage applications have been declining virtually every month. And just this Thursday we learned that new home mortgage applications fell another 18% from October to November. We also know that hedge funds have been buying 10,000 to 20,000 houses with the intent to rent them out. This isn't the kind of demand that spurs local economies; therefore, the housing market is not nearly as ‘hot’ as TV claims it is.
- In GDP (Gross Domestic Product), our economy grew faster than estimated, but when you dig into the numbers, you see that the majority of the gains came from companies increasing inventory levels in anticipation of a strong holiday season. Will that entire inventory build-up sell? Of course not. And (let us not forget) the government recently changed the way it includes intellectual property in the GDP. The most recent reading reflected that change – turning TV show reruns (because of their ‘implied value’) into GDP contributors.
- In profits, every retail CEO is saying that they will have to ‘promote the heck’ out of things in order to move their increased inventory. ‘Promote’ (in this case) means lower prices, and dramatically lower profits.
- In jobs, the numbers are now so distorted it is almost impossible to figure out just where the true unemployment level is. Last week we learned that weekly jobless claims hit a 2-month high of 368,000. Shadow Stats Inc. has the unemployment rate at 23% if we measured it like we did in the past. Or you can believe Uncle Sam’s 7% rate.
- On inflation, the PPI (Producer Price Index) came out on Friday with a slight drop. Meaning that our annual price inflation dropped and is now less than 2% per year. I don’t know anyone who believes that number.
The Fed knows that housing is just bumping along, jobs stink, sales stink, inventory builds are dangerous, profit margins are skinny, 65% of companies had their earnings estimates lowered (and still missed), companies are borrowing money to do stock buy backs, EPA regulations are killing entire business sectors, Obama Care is costing everyone extra thousands of dollars, savings are non-existent, banks are still in woeful shape and all in all – our economy is ‘just barely getting by’.
The Fed knows that cutting QE a week ahead of Christmas will reduce the amount of money that people will spend on the holiday. Therefore, logic tells me that they are not going to taper next week, but will tell us ‘in stern language’ that they were very ‘close’ but need a bit more data. If they were to toss out a small taper ($10 Billion a month) – that really wouldn’t affect the economy all that much – but it would affect investor psychology. The market would think that they've started tapering, and will continue through 2014. The market would not like it, and if the rich start selling stocks and hording money, then the real economy WILL grind to a halt. The new Fed (under Ms. Janet Yellen) would then have to step in and reverse course – jamming MORE QE into the system to repair the damage the taper did. I just don't think that the Fed wants that much drama.
But here is a wild card to consider. What if the elites know that our current economic system is doomed and in need of a complete overhaul? Could a new global reserve currency be so close to implementation that the Fed starts to taper, knowing it will blow up the economy and make people much more willing to accept any new plan? If the Fed removes the stimulus: the markets fall, economic activity falls, layoffs resume, and at some point the masses will scream for relief. The elites could then announce their new ‘reset’.
In a nutshell, I do not think that the Fed will taper. But if they do (and those cuts are not reinstated by Janet Yellen) – then the game has changed, and it is possible that they want to impart enough pain to soften folks up for a major change. Any tapering (that isn't reversed) is a big danger signal that something big is brewing.
Please – celebrate the season with loved ones, and share that feeling with your friends and family.
After the big pop over the fake jobs numbers we received a week ago, this week was met with a market trading downward and sloppy. On Tuesday evening, Washington came up with a mini-budget deal that will keep the Government from shutting down. I thought that the market might like the idea of fiscal stability, but instead the market sold-off on more Fed tapering worries. So, just like the other Fed meetings this year, the market is acting ugly ahead of it, and forcing the choice of ‘buying the dip’ or waiting until after the Fed announcement on Wednesday.
Many people are trying to convince me that since the market knows a taper is coming – that the taper must be ‘baked into’ current market pricing. And if that’s the case, a taper may not disrupt things. I'm not so sure. My feeling is that if they taper, the psychology will trickle over toward a full Fed ‘pullout’ by the end of 2014. Can our economy and our stock market hold up in the face of a Trillion dollars loss? Color me skeptical.
The next couple days should be quiet trading days on low volume. On Wednesday at 2:15 pm something WILL happen. We will either SOAR on no taper, or soar, stumble, grumble, pop, drop and basically see the market ‘flip-out’ over a taper. You could try and front run it with a straddle on the options market, buying both calls and puts on the big index's like the DIA or the SPY. With this type of trade I’d go out a few months because I think the whipsaw will be great. Or you could simply do nothing, and wait a couple of days.
I'm starting to make a list of what I’m going to buy if there is no taper, and what I’m going to short if there is a taper. I’ll be releasing this via Twitter during the week, and next weekend. I don't think I'll be doing a lot on Monday and Tuesday. Sometimes: “The only way to win is … not to play.”
In terms of gold and silver, the expected near-term Fed tapering and the retrenchment of the largest gold consumer (India) due to its government's import curbs are the two big factors hurting gold prices. In the longer-term, the reduction in QE, which is expected to be gradual, and the low real interest rates, are positive factors for gold. A 50-year chart of the gold price versus the S&P 500 Index shows that the current ratio of 0.7 is way below the long-term average of 1.13.
I'd like to recommend a website - http://www.simpleroptions.com It's an excellent resource and 'honestly' - I've been following them for over 6 months and they're more right than they are wrong on their predictions, and that's a rarity in this climate. Please check them out on my recommendation.
I continue to see gains with natural gas (UNG) while the Japanese Yen (FXY) continues to fall. I’m cautiously looking at:
- YHOO over 40.25,
- A (Agilent Technologies) over 55.50,
- BRCM (Broadcom) over 29.00,
- MS (Morgan Stanley) over 31.05, and
- And if GLD (Gold) breaks (downward) thru 1,218.36 (currently @ 1,238) – it could fall to 1,147 – so look at Put Options or DUST if it breaks thru that resistance level.
My current short-term holds are:
- CCJ – in at 20.50 (currently 20.75) – stop at entry,
- UNG – April 2014 $22 Calls – in at $0.62 (currently $1.52) – more room to run
- UNG – Dec. 21, 2013 $18 Calls – in at $1.41 (currently $3.44) – more room to run
- USO – April 2014 $37 Calls – in at $0.74 (currently $0.60) – looking for a move higher…
- FXY – March 2014 $97 Puts – in at $3.76 (currently $3.70) – looking for a continued drop as the Japanese currency is worse than US currency
- SIL – in at 24.51 (currently 10.87) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 119.58) – no stop ($1,238 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.97) – no stop ($19.70 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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