This
Week in Barrons – 1-26-2014
The Day After
Tomorrow… starring Dennis Quaid & Ms. Janet Yellen
As I look outside my window in Pittsburgh,
PA. – the scene looks and feels like it came right out of the movie: “Day After
Tomorrow” starring Dennis Quaid. But I
digress. Currently, the DOW is sitting
at 15,879. I remember just 3 weeks ago
(approaching the end of 2013) the DOW was 16,576. For the past 3 weeks we have peeled off about
250 DOW points per week, all leading up to Friday’s loss of 318 points in a
single session. All of the regular
questions surface: Why the soggy performance? Why the big down days? Why no earnings run? I suggest that
there are several ‘excuses’ (but only one answer) that I will toss on the
table:
1)
The
news out of China is not good. We’re
finding that the visible side of their economy is just as horribly corrupt as
other developing nations. Their bad loan
portfolios are loaded with junk. For
many years we have sent China our dollars in exchange for ‘every day low
prices’ on goods that Americans did not need and could not afford. It was a twisted form of vendor financing for
the entire U.S. This exchange has become
so much a part of our fabric, that any malfunction there causes a stir.
2)
The
Emerging Markets are just that – emerging.
The emerging markets are so completely dependent upon the U.S. ‘printing
money’ that as our economy hiccups – theirs takes a punch to the stomach. You need to look no further than the
currencies of Argentina and Puerto Rico (a U.S. territory) – as they are both facing
Greek-type defaults.
3)
The
‘Dry Shippers’ have all but ‘dried up’.
The movement of goods around the globe via ship is called ‘dry
shipping’. The dry shipping pricing rates
have fallen 71% year over year, and the index (which measures the volume of
material being shipped) is also down 43% year to date. Logic dictates that if our economy was
running on all cylinders, then the demand for shipping goods would be high, and
prices would be increasing. Factually: more
capacity did come on line, but not enough to see an almost 50% drop in prices year
to date.
4)
Housing
continues to take a hit. A shout out to
S. Forbes for bringing to our attention plummeting pending home sales in
California. In December 2013, pending home
sales in California fell 25.2% versus November.
The second consecutive monthly fall is being attributed to (a) a
shortage of homes for sale, (b) rising interest rates, and (c) higher home
prices. There's no question that affordable housing was a driving force in the U.S.
economy from 1950 right through 2006. But
despite low interest rates and a build up of the amount of people that would
like to have a home, we simply don't have the jobs, or the income to support a
thriving housing market. The Blackstone purchase
of 30,000 houses for rental purposes is NOT indicative of a strong housing
market. Strong housing happens when
people have jobs, are comfortable in their situations, and are willing to sign
on the dotted line. With 92 million
Americans out of the work force, this simply cannot happen.
5)
Let’s
not forget gold. Gold futures surged to $1,262.30
this week while the Dollar Index plunged to its largest daily percentage
decline since mid-October. If India does
relax it’s draconian import curb on gold, as recommended by Congress party
leader Sonia Gandhi, the pent-up demand for gold would help gold prices this
year. But be careful here as it could
only be a matter of time until
JP Morgan beats it down again via naked shorting.
6)
The
jobs situation is now at the mercy of Obamacare. It’s becoming very clear that our Wall Street
cheerleaders and politicians do not understand basic math. Assuming the published inflation numbers are
correct (and they’re not) – they fail to take into account the compounding
effect associated with 2+% inflation for the past 40 years. To demonstrate this effect you simply need to
walk down the aisles of a grocery store to find that prices are ‘out of sight’
for the things that we need. Doing some
basic arithmetic, according to the Bureau of Labor Statistics, of the 109
Million full-time wage or salary workers:
a. $40,872 / year is the average, annual, gross
paycheck. Remove the bare minimum of 25%
in taxes (federal, state, local, FICA, Medicare, etc.) =
b. $30,000 / year By
converting this to a monthly amount =
c. $2,500 / month. By subtracting the average rent and
automobile =
d. $700 / month to pay for: food, insurance, utilities,
cable, cell phone, clothes, repairs, entertainment etc. Therefore, the average
person really needs to ‘live with someone’ in order to make ends meet.
The low level of job creation combined with the accumulated ‘compounding’
of inflation has culminated in an atmosphere where we have priced ourselves out
of the luxury of having a middle class.
I think all these elements added
together are more than enough to toss the ‘Fear of God’ into the markets. But the truth is, we've had these issues for
years and the market blindly moved higher and higher. So, if we're really going to get a big
correction, I think that the real reason is The Fed (FOMC) meeting that begins:
‘The Day After Tomorrow’. The ONLY reason this market has marched
relentlessly higher year after year was QE1, QE2, the Twist, and QE3. But
now that the Fed is truly going to taper, the market is questioning whether the
economy is strong enough.
The first taper (last month) – was
really a ‘slight of hand’. Most people
realize that as they were tapering, the Fed was also ‘pushing back’ some
maturing debt so that the net amount was a virtual ‘wash’. But if they do another taper – taking us down
to $75B per month – there is nothing else to inject from the other side. Now $75B is still a lot of money, but this
market was based upon $85B flowing into the system. When that amount is reduced by 12% ($85B to
$75B), the corresponding stock action will be reduced accordingly. So it is my suggestion that the 318-point drop
on Friday is much more over the worry of what happens ‘The Day After Tomorrow’ (a Fed tapering) than any news from China,
or emerging markets.
Which begs the question: Will the
Fed cut another $10B next week? I think
they will. If only because they told
everyone that the program of cutting would continue. The Fed has sent its henchmen
out over the past weeks to talk at symposiums and preach the glory of cutting
back the stimulus. But, I tend to think
that this taper comes with a laundry list of commentary about how it isn't
written in stone that any additional tapers will be forthcoming. They may continue to say that if the data continues
to weaken, they can stop or even reverse the taper. If the Fed’s commentary mentions a ‘slowing’,
a ‘stoppage’ or a ‘reversing’ of the tapering program, the market will breathe
a big sigh of relief and go back to pushing overpriced stocks higher. But if they taper and hold the line on their
rhetoric about further cuts, I can finally see us facing our first 7 to 10%
correction.
The Market:
How important is the Fed in the
grand scheme of things? You can say what you'd like, but as I look around:
-
HSBC (a
major British Bank) won't let people withdraw their money unless they have a
signed paper from the person the money is going to. If you just want to take your money out, the
answer is ‘NO’. This is ‘Cyprus-Lite’, happening in a major British bank.
-
Gold
has begun to move higher as physical demand has gone parabolic (in the shape of
a hockey stick). On Thursday, JP
Morgan's vaults saw the second biggest draw down in history.
-
The
Chinese ‘shadow banking system’ is a bigger Ponzi scheme than ours, and major
cracks are showing.
-
Japan
is printing money like crazy, but the people are seeing none of the benefits.
-
So what
else is there if not The Fed?
I've said for years; if the Fed
continues to print, we will collapse on ourselves. If the Fed removes the stimulus, we will collapse
on ourselves. So, it is simply a matter
of which medicine we take. I think we
will be given the ‘Fed printing’ medicine. That means, that while I do think they will
taper on Wednesday, that very well could be the last taper – and in fact the
next move could be some new program designed to ‘jam money’ back into the
system.
Friday we were down 318 points on
the DOW. It was almost a mini panic. Currency markets were going crazy, and it was
the first real whiff of fear I've seen in many months. And, the market makers have every right to be
afraid. I took profits on all of my
short-term positions within the first half-hour of trading. While this market was set up for a pullback
many times during the past year, each time it was met with a ‘buy the dip’
reaction. On Friday, there was no sign
of that. In fact Friday's action said: ‘GTFO’
– Get The ‘Heck’ Out.
Technically, we have broken through many
support levels. On the DOW our next
‘light’ support level is around 15,757, and that’s another hundred points down
from here. The S&P has some loose
support around 1,775, but it wouldn’t take much to lose both of those levels of
support. While the market makers could
pull a rabbit out of the hat, the picture right now is bleak. The S&P is off about 3% from its highs,
and the DOW is off about 4%. This is as
deep as they've allowed any correction for a year. Maybe ‘the powers that be’ can halt the
bleeding here, but frankly it doesn’t look like it. Which brings me right back to the Fed. If Monday is ugly and there's market follow
through to the down side, if there's more currency disasters in emerging
markets, then what The Fed SAYS on Wednesday will be absolutely vital. If The Fed talks strongly about monitoring
the data and halting the taper, then the market will firm up. If The Fed does not, then we could finally see
our first big drop. Please be very careful here.
Tips:
I almost forgot, a
story that broke out of L.A. this week talks of $6.6B (in cash) that has come
up missing. It seems that the man
Congress put in charge of auditing the billions of dollars dumped on Iraq after
Saddam Hussein was toppled – has told the Los Angeles Times that he can't rule
out the possibility that the missing $6.6 billion (in cash) (sent from the U.S.
to Iran) was stolen. This is somewhat
humorous, as it would take approximately 12 separate C-130 flights to carry
this much cash. But with a ‘straight
face’ the special inspector general for Iraq reconstruction Stuart Bowen told
the Times the missing money may represent "the largest theft of funds in
national history." This money came
from a special fund set up by the Federal Reserve Bank of New York with Iraq's
own money – funds which were withheld from the nation during a decade of harsh
economic sanctions under Saddam. Now, the
real ‘kicker’ is that Iraq would like it’s money back, and has threatened to take
the U.S. government to court to reclaim it. The last known holder of the funds, before
they mysteriously disappeared was the U.S. government. "Congress is not looking forward to
having to spend billions of our money to make up for billions of their money
that we can't account for, and can't seem to find," said Rep. Henry A. Waxman
(D-Calif.) told the Times.
The good news:
This week I sold all of my UNG
(natural gas) holdings for a huge profit.
The bad news: I
sold it too soon, as it continues to go up.
The other news: I
was stopped out flat on virtually everything else: MDLZ, MOS, PFE, and
EMC. The currency situation with Japan
is troublesome – and my nearly flat FXY position reflects that.
I’m not comfortable blindly buying the stock indexes
at these levels. But (at the same time) I’m
scared of shorting this market.
-
One of the asset
classes that I like right here is Gold (GLD) and Silver (SLV). With Gold (GLD) moving over $1,260 / ounce –
it should get to 1,300 fairly quickly.
-
Another group that
I like (but want to see rebound) are the Bio-Techs, and names like: GILD, INCY,
CELG, REGN, and BIIB are definitely on my radar – despite the recent turmoil.
My
current short-term holds are:
-
USO
– April 2014 $37 Calls – in USO at $34.51 (currently $34.58)
-
FXY
– March 2014 $97 Puts – in FXY at $96.47 (currently $95.47)
-
SIL – in at 24.51 (currently 12.38) – no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
122.29) – no stop ($1,264.50 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 19.16)
– no stop ($19.90 per physical ounce).
To
follow me on Twitter and get my daily thoughts and trades – my handle is:
taylorpamm.
Please
be safe out there!
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 with their predictions, and that's a
rarity in this climate. Please check
them out on my recommendation.
Disclaimer:
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: <http://rfcfinancialnews.blogspot.com> .
Please
write to Mr. Culbertson at: <rfc@culbertsons.com> 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 <rfcfinancialnews.blogspot.com>.
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: http://www.youtube.com/watch?v=K2Z9I_6ciH0
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://rfcfinancialnews.blogspot.com/>
Until next week – be safe.
R.F. Culbertson
<http://rfcfinancialnews.blogspot.com>
