This Week in Barrons – 12-22-2013
It’s been just ‘one of those’ years…
This has been one of (if not ‘THE’) strangest investing years I've ever seen. The average investor’s 401k is up approximately 24%, and they are feeling pretty good about the year. By ‘going with the flow’ the average investor has enjoyed one of the best years in history. Michael Snyder compiled a list of statistics from 2013 that are too crazy to believe:
- The rate of U.S. home ownership has fallen for the eighth consecutive year.
- 102 million working age Americans do not have a job.
- 40% of our workforce makes less than $20,000 a year.
- 40% of all workers are making less than what a full-time minimum wage worker made in 1968 (adjusted for inflation).
- Food stamp participation has grown from 17 million in 2000, to more than 47 million in 2013.
- In 5 years, the U.S. Debt to GDP (Gross Domestic Product) ratio has increased over 44%.
- The U.S. median household income has fallen every year, for the past 5 years.
- Total global debt levels are 30% higher than they were back during the financial crisis of 2008.
- And perhaps the most meaningful statistic of all: Only 7% of all non-farm workers in the United States are self-employed / entrepreneurs. That is the lowest percentage on record. If you’re asking our small businesses to grow us out of this recession – we need to figure out how to teach them: ‘sales’, ‘team-building’, ‘decision-making’ and ‘cash flow’.
Steve Forbes reminded me that Mr. Elon Musk was recently named ‘Person of the Year’ – and high-lighted an interview that he did: http://money.cnn.com/2013/11/21/leadership/steve-jobs-elon-musk.pr.fortune/index.html
For me a couple elements stood out:
- Much of Mr. Musk’s clarity of vision comes from the basic laws of physics – he calls them the ‘first principles of reasoning’. He talks of boiling things down to their fundamental truths and reasoning up from there – as opposed to reasoning by analogy. “Most of our life is spent reasoning by analogy – which basically means copying what other people do with a slight variation. An example of ‘reasoning by analogy’ would be: Someone in 1900 thinking that the way to provide faster transportation would be to breed stronger horses. Unfortunately, that is NOT how the world changes.”
- Mr. Musk used his ‘first principles of reasoning’ theory to launch SpaceX – long before he had a rocket design. Without looking at what NASA had created and pondering how to tweak it, he started with the laws of physics. To lift ‘X’ pounds into orbit would take ‘Y’ amount of fuel and necessitate raw materials costing ‘Z’. By adding ‘Y’ and ‘Z’ together, the result was barely 1% of what NASA spent per launch. Total cost never dwarfs raw materials costs like that. Therefore a smart design and manufacturing process should be able to produce a rocket that would cost orders of magnitude less. He gambled a huge chunk of his personal net worth on SpaceX, long before there was even a design on the table. It was the clarity of the underlying physics that gave him the confidence that innovation was there for the taking.
- With Tesla, Mr. Musk was convinced that the electric car was essential if humanity was to have a shot at a sustainable-energy future. That conviction led him (in the midst of the bleak market crash of 2008), to personally gamble his last dollars to keep the company alive, and give the Model S a chance to see the light of day.
- “Conviction doesn’t necessarily mean certainty”. In fact Mr. Musk said: “I thought the likeliest outcome was failure."
Let Mr. Elon Musk act as a reminder to all future entrepreneurs:
- Dream big, and don’t allow your main focus to be on making money.
- Embrace and expose yourself to the world's most inspiring designs and designers.
- Make things as simple as you can – and no simpler.
- Play with radical, future possibilities – and keep playing until you find something really big that you believe in.
‘Tis the season for good friends, joy and relaxation. I often try and find a few moments on Christmas day to reflect upon all the gifts I have been given – throughout the year. I hope you and your family enjoy your day as much as I will. Peace on Earth – good will toward man. Take Care.
On Friday the DOW closed at 16,221. That was light years higher than after the incredible tech run of the late 90's, and higher than the housing bubble of 2007. Yet the facts that underlie our real economy are so completely horrific, that logic says ‘We can't be this high.’ Unfortunately logic doesn't have bankers running printing presses.
We had every reason to believe that if The Ben Bernanke actually started to ‘taper QE’ that would spell the end of the market's rise to glory. But what he did was simply put out headline fodder. We found out last week that the Fed really isn't tapering anything, and in fact promised to keep rates at zero even if the last 6.5% threshold of unemployment was met. We learned that the Fed is reinvesting the interest back into bond and mortgage purchases; therefore, the ‘pre-taper’ figure was closer to $95 Billion a month in purchases – making the $10 Billion a month taper a moot point.
This week the Ben Bernanke promised that zero interest rates would be here for years to come. Does that mean we will have another year of no pullbacks, no corrections and ever-higher markets? It just might. The market may very well ignore the horrible facts of our economy and just jam stocks higher.
Companies have taken advantage of these low interest rates by taking out loans. And with the newly borrowed money they have bought back their own stock and increased dividends – thereby driving stock prices higher. By March of 2013, companies had announced over $1 Trillion worth of buy backs. The way this works:
- Companies borrow money (at near zero interest rates) and buy back their stock.
- That reduces the total amount of company shares outstanding and increases earnings per share.
- The increased earnings per share – increases demand for the stock, and the stock price rises.
- That is why this market goes on to record highs, despite seeing the highest amount of earnings warnings/misses in a quarter - EVER.
This market has gone further than I thought they could take it; therefore, I need to reassess. I do think we are in for a year-end Santa Claus rally and January effect. This week we should hold steady and eek out some more gains.
With the stock market up 23% year-to-date, will the money managers ‘lock in their gains’ and sell before the end of the year? I don’t think so. If they sell now, they will need to pay taxes in April of 2014. But if they go into January and accumulate any year-end run, they can sell later in January and have a full 15 more months before they would have to pay the tax burden. Thus, we are probably clear to run to year-end and into the New Year. After that, I would start to be concerned.
So with that in mind, it is my thinking that we are going to levitate into year-end as Santa pays a visit to Wall Street. I think you can pick up some stocks and take a ‘winners lap’ into the start of the New Year. Keep your eyes on financials and technology, as both should do well.
This week I sold some UNG December $18 calls (the natural gas ETF) for over 100% profit. With this type of ETF it’s important to examine the underlying commodity. In this case, natural gas has run from $4.10 to $4.40 – and if it continues to run to $4.90 – the corresponding April calls could turn into a 1,000% profit generator. Therefore, it’s not too late to purchase some April, $22 calls in UNG.
The same is true of USO (the oil ETF). As the underlying price of oil continues to rise – future dated ‘CALL’ contracts are the place to be.
With the ‘taper’, the US dollar continues to rise against the Japanese Yen – and therefore the FXY (the ETF that tracks the Japanese currency) – continues to fall. Future dated PUT contracts make the most sense here.
Lastly, I’m beginning to dip my toe into XHB – the housing index. As you see below, I’m using future dated CALL contracts to make that dive.
My current short-term holds are:
- UNG – April 2014 $22 Calls – in at $0.62 (currently $1.67) – more room to run,
- UNG – Jan $19 Calls – in at $2.20 (currently $2.84) – more room to run,
- USO – April 2014 $37 Calls – in at $0.74 (currently $0.76) – moving higher,
- FXY – March 2014 $97 Puts – in at $3.76 (currently $4.10) – we’re ‘tapering’ – they’re not,
- XHB – Mar 2014 $33 Calls – in at $0.85 (currently $1.01) – more room to run,
- AKAM – in at 47.08 (currently 47.70) – stop at entry,
- DDD – in at 82.60 (currently 86.99) – stop at 84.25,
- DD – in at 62.26 (currently 62.88) – stop at entry,
- SIL – in at 24.51 (currently 10.60) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 115.90) – no stop ($1,203 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.64) – no stop ($19.41 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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