This Week in Barrons – 11-24-2013
A Fed Insider "Fesses-Up", and then there’s Bitcoin!
The latest ‘Annual Survey on Global Prosperity’ reported: “With the exception of the United States, all countries in the Americas have improved their overall Prosperity Index score in the last five years.” The non-partisan Legatum Institute in London looks at a host of measures (economic, social and governmental), to determine where countries are making the greatest strides toward increasing prosperity for their people. If you’re living in the U.S., I (unfortunately) do not bring good tidings. The U.S. currently ranks 11th among the world’s most prosperous countries.
- In the ‘Economic Sub-Index’ of the total report, the U.S. has fallen out of the Top 20 due to our: declining domestic savings rate, declining high-tech exports, declining 5-year growth rate of our per-capita GDP, declining confidence in our financial system, and our declining access to food and shelter. Less than 1/3 of Americans think that it’s a good time to find a job, and 70% believe corruption is widespread in U.S. business and government.
- On the Entrepreneurship & Opportunity (E&O) sub-index, the U.S. has fallen to 13th. Other than Hong Kong being 10th, the nations with the greatest E&O readings are all in Europe. The irony has Old World economies upstaging the land that birthed entrepreneurial zeal and opportunity. We are becoming what Europe was, while Europe is becoming what we were.
- Our Safety & Security have fallen to 31st, and our Governance as fallen to 11th. Only 35% of Americans have confidence in the people we elect to office (vs the global average of 52%).
- We placed 16th on personal freedom – after Europe, Uruguay, Australia, New Zealand, and others.
- We ranked 9th in Social Capital – meaning more Americans have served as volunteers or donated to charity than did our global peers.
- And we are 5th in Education.
But the Legatum Institute’s report was NOT the most disturbing news of the week. On Monday, John Crudele of the New York Post caused a stir with an article declaring that the reason the unemployment numbers (heading into the 2012 presidential election) were falling was because they were FAKED. Apparently President Obama needed something concrete to point to concerning the economy, and the labor department complied by simply MAKING-UP some of the data. The part that I find most entertaining is that when those numbers came out, I wrote about them as being fake. Jack Welch came out and openly said: “Just like being back in Chicago, Obama FIXED the jobs numbers to make himself look good.” The world called us both liars.
Along the lines of fake numbers:
- The number of people ‘Not in the Labor Pool’ continues to cause our unemployment index to decline. If we simply measured unemployment the same way we did in the 80’s – our unemployment rate would be over 16% - instead of the 7.2% currently being reported.
- Currently ‘food and energy’ are not included inside the inflation index because they are ‘too volatile’. I don’t know about you, but a large percentage of my monthly budget is spent on food and energy – go figure?
- Oh, and IF something (legitimately) costs more, the government says that because it’s more technologically advanced, it is (in fact) costing you less. I kid you not. The government tells us (for example): if a car cost $18,000 last year, and costs $18,720 this year – it’s actually cheaper because bundled into the new car are technological improvements that will save lives and prevent accidents. So that car (according to our government) actually went DOWN in price. Really?
- Finally, Carl Icahn caused a market sell off this week, by saying that almost all of the stock market’s earnings reports are ‘a mirage’. Carl Icahn is right. If banks (for example) were forced to report their holdings on a ‘mark to market’ basis they would all be found to be insolvent. Instead, Congress has allowed banks to do ‘mark to model’ accounting. What this means is: when a bank repossess a house on which they granted a $700K mortgage (but today is only worth $425K), the bank does NOT have to carry that $275K loss on their books. They can ‘mark the asset’ to what they thought it was worth in their ‘model’ – presumably the $700k – and breakeven. Wow!
Speaking of things decreasing in value, since the day the Federal Reserve was created, our currency has lost ‘buying power’ / ‘value’. The U.S. dollar is worth approximately 7 cents in comparison to what it could buy back in 1915. So our Fed has done a yeoman’s job of destroying the ‘value’ of our currency. This is disturbing to anyone who SAVES dollars because those same dollars (in the future) end up buying fewer goods and services.
Throughout history, the most successful way of preventing monetary inflation has been through holding gold and real estate. I often hear that the only way we can get back to a more stable world of monetary value is by going back to some form of gold standard. Frankly, that is false for several reasons. Having a gold or silver backed currency does NOT prevent depressions – remember the 1930’s. But even more important to the concept of sound monetary policy is something the world needs in abundance and lacks abundantly - honesty, morality and truth. Without those concepts, any currency will be perverted no matter what it is backed with.
Years ago, entire empires used precious metals as their daily coinage. But the king, or Senate would soon outspend the amount of gold in their vaults. So they would shave the gold from their coins, making them smaller and lighter. They would add a less expensive alloy to their coins. Over the years, fraud and dishonesty proved to be the downfall. Therefore, even a ‘gold backed’ currency, would not prevent any country from lying about the amount of gold in their vault. While holding physical gold and silver at the individual level has been a pretty good way to preserve wealth, it is not the ultimate answer to a stable currency. A sound currency comes from honesty, and that’s something we severely lack.
However, in 2009, a new currency arrived on the scene that has the ability to CHANGE HISTORY. Historical and existing currency systems fail due to greedy, criminal people that lie about:
- The amount of currency they have made,
- How much (in precious metals) is there to back it up,
- The value of the currency, and
- The velocity of people using the currency.
Bitcoin is entirely new, and completely different. We all knew computers would change the world in a most profound way, but not many ventured to think computers would change the historical meaning, distribution, and the VALUE of money.
Bitcoin is digital currency that is:
- Transparent to everyone and immune to criminals,
- Un-Printable and Un-Deniable (in terms of) what is out there, and
- When you buy and sell with it, there's a permanent and public record of the transaction. (That is how the entire Bitcoin ‘float’ is tracked. The record only notes the landing address or code of the person that took delivery. It does not identify the owner.)
- Finally, Bitcoin has no nationalistic boundaries. It is the same Bitcoin in Japan as Canada, as Korea, as Italy, and therefore no currency adjustments for geography.
Because of these virtues, Governments are scared. They are scare of not being able to control it, print more of it, keep it from people, distort it or in any other way take charge of it. For 6,000 years, man has wanted a way to put the power of money into the hands of the people and let the market set the value. Bitcoin does just that. It's too early to tell whether Bitcoin is the real answer to our problems, but the barn door is open. The world now has a digital currency with most of the positives of a normal currency and NONE of the negatives.
Because ‘people’ control the treasuries of our nations, no money system is above abuse. Certainly a currency backed by some amount of gold is far preferable to the junk that is currently being created. Bitcoin is a new form of currency that man's greed can't abuse. Honestly, it’s good that the NY Post decided to run that article on ‘faking’ the numbers – because just maybe it will serve as a wake-up call for one, or some, or many.
Thanksgiving is my favorite holiday – and I hope that your Thanksgiving is spent with family and loved ones.
In keeping with the ‘currency’ theme, the People's Bank of China has hinted strongly that they no longer need a huge stockpile of reserve currency. This suggests that they are going to stop hoarding dollars. Which means that they would (by extension) stop buying U.S. Treasuries.
If this ‘hint’ is true, then it will be one of the most significant economic impacts of the last 20 years. For over two decades the U.S. has enjoyed inexpensive Chinese products because China has purchased our dollars, and kept their own currency low. If they are going to let the Yuan begin to float more freely, not only does the cost of Chinese imports rise, but who will buy U.S. Treasuries? Without China purchasing our treasuries, interest rates would have to soar, and our own Fed would then have to purchase more treasury debt as well as print more money. Obviously, this would get ugly very quickly.
This news was simply ignored by the equity markets this week. Currently bad news is good news, mediocre news is better news, and good news is absolutely fantastic. No matter what hits the wires, the market shrugs it off and pushes higher. Did it matter that housing sales were down? Nope. Did it matter that the Regional Fed reports were abysmal? Nope. What about Wal-Mart, Dollar Tree, Target and dozens of other retailers saying that the consumer is tapped out? Nope - lets hit another all-time high.
Now, history has shown us this behavior between 1998 and 2000, and again between 2006 and 2007. Both times it ended badly, and I fear this sequel will end badly as well. A major crash is coming, but no one knows the exact date. It could be February, or in 2015. We know that the fundamental elements of a sound economy are sorely missing, and ObamaCare, EPA rules, Global warming, Business Regulations and the host of other ills are only making things worse. China abandoning the U.S. dollar makes things much, much worse.
The market continues to press higher, but on NO volume. That means one of two things:
- First, it could mean that everyone that wanted to be in the market is already in the market, and the banksters are responsible for keeping it going higher.
- Or, it could mean that the last swell of money inflows has yet to happen, and as people can't stand the pressure – they will soon ‘just jump into the market’.
Low volume always signals an impending rug pull as the big players know what's coming, and don't commit new money. The difficulty is that December is historically the strongest time of the year. So, are the big players really going to do a 4 -6% pullback between now and yearend? After all, the market has run considerably further than it should have based on real fundamentals, and every fund manager is thinking that he should ‘lock in’ these big gains. The only way to lock in market gains is to sell your positions. Therefore, yes there is a distinct possibility of some selling. But I think as they lock in gains, the market will absorb the one or two day dips, and those late comers to the party will try and buy the dip, hoping to eek out every last dime this year has to offer.
I don't think this rally ends until late December (if then). I think any pullback will be a 2 to 3% quick dip and will press back up. I’m leaning long, but not over extending. There will be more ‘taper talk’, that will cap some of the froth in the market. But, unless they actually do taper the QE program, there's not much to worry about right now. Earnings are over, and it's full steam ahead.
This week I sold TGT flat, and MOS & CLF for a $1 (per share) gain.
Friday closed out the week strong, and that may cause a slight weakening at the beginning of this week. But I think the market will digest the ‘all time highs’ and continue to move us higher. I’m looking for a good entry on: Constellation Brands (STZ = $70.36), Russell iShares (IWM = $111.80), Smith & Wesson Holdings (SWHC = $11.97), and Federal Signal Corp (FSS = $15.99)
- The 3D printer space sorted itself out – with virtually everyone coming out in favor of DDD and SSYS.
- Green Mountain Coffee Roasters (GMCR) came out and sold more K-cups than anyone thought – and immediately sprinted higher on the news. It’s becoming an interesting ‘weekly’ covered call options play.
- I still like GILD and INCY in healthcare.
- I like ACI – but only covering it with the $4 calls – giving you a 10% yield for 4-week hold.
- Take a look at NPSP – the $23 in the money calls – are yielding a net 4% for the month.
- AND – I like Twitter (TWRT) – but ONLY covering it with the $41 or $40.50 calls – giving you between 1.5% and 2% yield for the week.
My current short-term holds are:
- TSO in at 50.56 (currently 57.24) – stop at 56,
- JNJ – in at 94.50 (currently 95.24) – stop at entry,
- CCJ – in at 20.50 (currently 20.47) – stop at 19.80,
- SIL – in at 24.51 (currently 11.50) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 120.05) – no stop ($1,244.00 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 19.12) – no stop ($19.86 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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Until next week – be safe.