This
Week in Barrons – 1-12-2014
In the Short-Term:
Last week I talked about what I feel is coming in the
long-term. I talked about currency
resets and other elements that will take years to develop. But what will happen before we get there? For the past 6 years, we have seen the Fed
‘make’ the markets go – where they want them to go. The Fed:
- Supported the economy enough
to keep it functioning,
- Invented enough economic
reports to keep citizens from being afraid, and
- Pushed the idea of
‘consumption’ to the point of being vulgar.
Not long ago, ‘The Ben Bernanke’ announced that the Fed was reducing
their asset purchases of $85 Billion/month by $10 Billion/month. This was termed ‘tapering’. This week we found out that the Fed is
continuing to ‘invest’ all of the ‘interest’ that is coming due back into the
market, and (you guessed it) that amount just happened to be - $10
Billion/month. Therefore, The Ben Bernanke
really didn't cut anything. He started
at $85 Billion/month, added the interest payments that would have made it $95 Billion/month,
and ‘tapered’ by $10 Billion to get us exactly where we started. But that is exactly the problem; we only know what
we’re being told. Remember, a lawsuit
had to be filed against the Federal Reserve in order to find out that they had
actually printed $16 Trillion and sent it to Europe during the height
of the financial crisis. So telling us
the correct information is NOT the Fed’s strong suit.
But, let’s put that aside for a moment. We all know that a large percentage of the stock
market gains in 2013 were as a result of the Fed printing money, pushing it
into banks, and the banks investing it into the stock market. If the Fed curtails printing, then common
sense will tell you that stocks will fade-off accordingly. I know that TV’s ‘talking heads’ will say
that the economy is accelerating, and the Fed can cut out ALL their printing by
September or October. But honestly, NO
amount of increased economic activity is going to produce $1.1 Trillion worth
of ‘free-money’ cash flow – ready for the banks to invest into the capital
markets.
This leaves us in a quandary.
While we are seeing pockets of economic strength and activity, it’s just
not at the level we need to keep our markets where they are without Fed money. Last week we heard from FedEx that they are
going to borrow more money in order to buy back a couple billion dollars worth
of their own stock. This does two
things: (a) It reduces the ‘float’ (the amount of stock available for purchase)
– thereby causing investors to pay more to buy the existing stock, and (b) It
artificially boosts FedEx’s earnings per share (EPS) – a common measure of CEO
effectiveness. For example:
- If you’re the CEO of FedEx –
you need to show EPS growth,
- You know that your earnings
are going to stink like 3-day old fish,
- You know that you can’t
increase sales, or reduce costs any further,
- Therefore, the only element
you can change is the number of shares outstanding, which allows your existing
profits to be divided over fewer shares.
- So if you reduce the float by
10%, you have increased your earnings per share by 10%, without impacting the
economy (jobs) at all.
Well – you say: “So What?”
Consider this: the Fed’s money
has a few intended consequences – the most important of which is to keep
interest rates low. Will interest rates
remain low if the Fed continues to ‘taper’?
No. If the Fed wasn't in the
market buying up U.S. debt (and keeping mortgage rates low) – we would NOT be
looking at 2.9% rates for 10-year Treasury bonds, or 4.2% mortgages. We would (instead) be looking at 4.5% 10-year
rates, and 6.4% mortgages. We would NOT
be seeing corporations borrow money in order to buy back their own stock
(because interest rates would be too high to pay back the loans). And we would NOT be seeing a DOW at 16K.
In other words, talk is cheap. The Fed can say that they’re going to stop
printing, if the Fed money stops – interest rates rise, and the economy and
stock market stall and fade. It’s my
view that the Fed will NOT decrease the amount of their printing this year at
all. As Ms. Yellen takes over the helm
at the Fed, she will not be willing to enter into the New Year with a crashing
stock market. I'm fairly confident that
she'll keep the monetary spigot wide open.
However, this does introduce another short-term problem. Stocks are expensive right now. Because there have been more pre-warnings this
quarter than we have seen in 10 years, analysts have reduced their
expectations. Expensive markets at a
time when companies are struggling to beat already lowered estimates – means
that no company can ‘bluff’ its way higher if the Fed's money supply dries up. As sad as this seems, I think we need the
Fed’s money supply in order to make more ‘goofy’ excuses as to why stocks
should be going higher. It’s sad because
we have a stock market at all-time highs, while our nation is seeing:
- A record number of citizens on
disability,
- A record number on food
stamps,
- A record number on Government
assistance, and
- A record number of Part-Time
workers.
Therefore, the stock market and the general economy are tied
directly to the stimulus provided by the Fed. If they keep the spigot open, there is no
reason why we can’t see the market at 18K or 19K by year’s end. Of course that’s not right – but if the banks
are going to take in free money, and not lend it out, they will certainly place
the bulk of it into the stock market as they’ve done in the past.
So in the short-term, the dollar is debased and the stock market
moves higher. I think a way out of this
mess would be to: (a) open the oil fields, (b) build 10 refineries, (c) cut the
EPA and other government ‘red tape’ on businesses, and (d) lower the barriers to
entry for a small business. But nobody
will do that – not with virtually every year being an election year.
I think that this market moves higher by double digits this
year. One interesting element to make
note of – is that during the past couple of months we have seen some ‘major’
selling from the likes of Warren Buffet and other billionaires. Insiders are selling more of their own stock
at the fastest pace since 2007. All the
while J. Q. Public is thinking that it’s time to jump aboard the stock market
train (again). Realize – often
when this happens – the train has already left the station and it’s J.Q. Public
who suffers.
Next week, I will focus on Gold and Silver. Many are wondering if the precious metals have
had their ‘day in the sun’ and are now going to take a ‘pause’. Next week I’ll put my cards on the table.
The Market:
On Friday, we received the Government’s take on how many jobs we
produced in December. The expectations
were for over 200K new jobs. The real
number came in at an incredibly lousy 74K.
As if to add insult to injury, with 347K people ‘giving up’ looking for
work – the unemployment rate actually FELL to 6.7%. We are now at the point that (out of a total U.S.
population of 320 Million) – 91.8 Million are no longer in the work force. This level of labor participation rate has
not been seen since 1978. Just about
one-third of all the people in this country do NOT have a job! And our stock market is at all time highs. What’s wrong with this picture?
The ‘talking heads’ are dismissing Friday's jobs report as an
anomaly, but I believe it actually tells the correct story. The jobs we are creating are part-time and
low paying. The good news is – that
because the employment number was so bad, it would be hard for even the Fed to support
increased tapering. So as disgusting as
this sounds, chances are good that the jobs report will be accepted as a need
for a stimulus continuation and will push the markets higher.
Over the past week, a lot of stocks did some ‘backing down’. A sector that did move higher was the
‘transports’. One of the old adages of the market
is that it can't be a real ‘bull market’ unless the transport sector confirms
the move higher. Well, the transport
sector did that – on a decidedly lousy week. That said, I
thought that we’d start this year fairly robust and then trail off during
earnings season. It is possible that the
game plan has changed, and we are seeing a bit more backing and filling earlier
in the month than I expected.
The market players are quite expert at making ‘average folks’ believe
we're in an economic sweet spot. While
driving the other day, I listened to a talk show where the caller asked the
question: “With the stock market at all time highs, and with corporate profits
soaring, why does anyone think that Obama's policy aren't working?" Be careful here, as this is the thinking that
gets J.Q. Public investing in the ‘buy high – sell low’ strategy.
You can lean long, just be cautious!
Tips:
Virtually everywhere I look, people are talking about
the 3D printing space. This week’s
Consumer Electronics Show (CES) caused some stir surrounding 3D printing
companies: 3D Systems (DDD) and Stratasys (SSYS). One investment firm even raised its estimates
on Friday for DDD to $98, and for SSYS to $165.
CES did bring out some interesting announcements – for example:
- The CubeJet – a sub-$5,000 printer that combines ColorJet
printing technology with the ease-of-use of less expensive Cube printers,
- The Touch, a $499 3D
sculpting/design mouse,
- The ChefJet and ChefJet Pro - for
printing edible confections,
- The CeraJet a sub-$10,000 printer
for creating color ceramic objects, and
- The Cube 3, a sub-$1,000 device that
is the first plug-n-play consumer printer.
Rivals to
these two market makers were busy launching sub-$1K 3D printers – all
emphasizing ease-of-use. These newer companies
can't match the software support and web marketplace ecosystems DDD and SSYS
provide, but will provide low-end pricing pressure. FYI: 3D Systems now trades at 74X 2014’s
estimated earnings per share, and Stratasys trades at 57X 2014’s estimated
earnings per share.
The parabolic nature
of this industry should bring pause to investors. DDD needs three years of 30% revenue growth
and zero stock gains in order to get their existing revenue levels down to even
10X levels. Even more concerning for DDD
investors is that their ratios are now so far ahead of their primary competitor
SSYS, that DDD is making SSYS the better ‘value’ investment. The likely outcome is that DDD will come back
to Earth (over time) while SSYS will remain grounded at these levels. The 3D printing industry remains in a
fantastic bull mode, but investments typically don't end well at these lofty
multiples.
We previously outlined a ‘covered call’ investment
strategy that has certainly helped us in an up-trending market. Next week we’re going to outline a
‘sister-strategy’ that will add some support in ‘down-trending’ markets as
well.
This week I sold my XHB – Mar 2014 $33
Calls for over a 40% gain, but USO, UCO, and even FXY did come under
pressure. I added some ATVI and NVDA
this week and put a ‘toe in the water’ with DECK and SINA.
My
current short-term holds are:
-
USO
– April 2014 $37 Calls – in USO at $34.51 (currently $33.28)
-
FXY
– March 2014 $97 Puts – in FXY at $96.47 (currently $93.82)
-
EMC
– in at 24.74 (currently 25.35) – stop at entry,
-
DDD
– in at 82.60 (currently 94.25) – stop at 93.00,
-
SSYS
– in at 126.63 (currently 133.65) – stop at 132.00,
-
SIL – in at 24.51 (currently 11.36) – no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
120.43) – no stop ($1,249 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 19.39)
– no stop ($20.18 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.
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