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.
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!
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.
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: <> .
Please write to Mr. Culbertson at: <firstname.lastname@example.org> 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 <>.
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:
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://>
Until next week – be safe.