This Week in Barrons – 2-2-2014
The State of Which Union?
There appears to be three unions. The one I grew up in, the one I live in, and the one the President wants me to live in. When I listened to our President the other evening, his version of America and mine don't mix well. Allow me to give two examples:
1. In my day, you strived to do better. There were competitions where you'd compete against others and try to win. Then the best and brightest would be placed on special teams and in advanced classes, knowing that the general selections would be boring to them. But here’s something talked about by President Obama: A popular gifted-student program is getting the ax after officials decided it lacked diversity. “Our classes will be heterogeneously grouped to reflect the diversity of our student body and the community we live in. We believe that all children can learn and achieve high standards. We also know that we want all children to have equal access to high quality, a challenging curriculum, and to have ample opportunities to master complex material and build academic and personal self-confidence. We also want our classes to reflect the diversity of our community. We believe we can have both: classrooms characterized by rigor and diversity.”
a. Are you kidding me? In an era where ‘educationally’ the U.S. is already losing ground to virtually every other nation – you’re taking away a gifted student program because it didn’t conform to a particular diversity percentage in a community.
b. Are you kidding me? We’re no long encouraging the gifted child, but instead relegating them to the potting soil of educational mediocrity.
c. Are you kidding me? I can only hope that the same diversity net is being applied to the football team, the tennis team, the swimming team, the chess team and the debate club.
d. America used to work. It doesn’t anymore. I don’t hear anything about going back to the way things were. I hear a lot about more change, more regulations, more social engineering, more wealth distribution, more Government oversight, and more controls. Can’t we just admit that we screwed something up very badly, and we need to set it back? Why is everything the ‘New Normal’? We’ve turned rugged individualism into the social unicorn of conformity.
2. My second example starts with a ‘shout out’ to S. Forbes for stimulating a discussion about the minimum wage. In the State of the Union Address, President Obama – by executive order – decreed that he would raise the minimum wage by almost 40% on contractors doing work for the government. In my opinion, the companies affected are NOT simply going to increase the wages of the people currently making $7.25 per hour to $10.10 per hour, and maintain the status quo. My thinking goes like this:
a. One ‘good’ programmer is equal to ten ‘average’ programmers, and one ‘great’ programmer is equal to a thousand ‘average’ programmers. The caveat here is that you do NOT pay the ‘good’ and ‘great’ programmers 10 or 100 TIMES as much as the ‘average’ guy. Their abilities are greater than their compensation. In other lines of work a ‘good’ individual is more likely worth 2 or 3 ‘average’ individuals – again without the commensurate levels of compensation.
b. I do not think that the current workers earning the federal minimum wage of $7.25 per hour – are going to be the ones getting a 40% raise to $10.10 or even $15/hr. In my opinion, companies will find NEW $10.10 or $15/hr. employees. The $10.10 or $15/hr. worker has an improved skill set, is more efficient (like the ‘good’ and ‘great’ programmers), and can (therefore) do the job of 2 or 3 minimum wage, ‘average’ workers. Therefore, there will be a mass ‘firing’ of minimum wage workers, and a hiring of better qualified $10.10 or $15/hr. individuals – who will do the job of 2 or 3 minimum wage workers. Bottom line: I don't think that this will hurt small business efficiency at all. In fact, President Obama (with this regulation) could actually put more people out of work due to the hiring of more efficient workers displacing the existing minimum wage earners. Now before you think that’s bad. President Obama’s current approval rating is at an all time low. By having more people out of work, on government welfare, food stamps, 99 weeks of unemployment system – Mr. Obama could have secured the 2016 Democratic presidency for his party’s candidate. I think that this is a brilliant political and tactical maneuver, but if the perception is that the $7.25/hr. guy is going to get a raise to $10.10/hr. – nah – that’s just not going to happen!
President Obama’s view of progress and change is fundamentally against virtually everything I cherish about the "Old America". Of course it wasn't all wine and roses back then. But we were considerably freer from Government intrusion, had a middle class, people respected each other, and there were no school shootings. Our children were encouraged to ‘compete and win’ – and ‘conformity’ was something you ‘ran away’ from – NOT something that you ‘strived’ for.
So far January has been a real mess for the bulls. Taking a walk down memory lane, the Federal Reserve did QE1, QE2, the Twist, and QE3 – with each of these programs pushing Billions of dollars into the system. The goals of these programs were: (a) to keep interest rates at or near zero, and (b) to flood the insolvent banks with money. The goal was ‘never’ to make sure that the banks did ‘the right thing’ and apply those monies to the areas that should get them. Therefore, the banks created profits for themselves by pushing large portions of this money into emerging markets and stocks.
Factually we’re 5 years into Obama’s recovery and to this day:
- 92 million Americans aren't in the work force,
- Home sales are lower for the 7th consecutive month,
- Food stamp use is soaring, and
- Welfare of all shapes and forms is becoming a way of life.
Stocks made it to all-time highs because of Federal Reserve money. Now that the Fed is taking back some of that money – the areas that the banks invested in (emerging markets and stocks) are paying the price. This isn't a surprise. I expected we would see an earnings-run then a stock slump, but it appears that the ‘tapering’ fear was bigger than any earnings-run ‘hope’.
So now the question is: ‘Will the Fed continue tapering until all $90 Billion/month is gone?’ In my view, the economy is NOT fixed, the banks are NOT fixed, and the markets will NOT hold these high levels without Fed money. Therefore, one of two things will happen. First (and most probable) is that after some more economic pain (and stock market drops) the Fed will announce that they will be stopping their tapering operations. And if things don't improve, the Fed will come up with a ‘new and improved’ program that will push even more money into the system.
The Second possibility is that the Fed realizes that the world absolutely hates the U.S. dollar (because of how we have devalued it), and decides to defend what is left of it at all cost. The Fed knows that many countries don't want the U.S. dollar as the world reserve currency. They also know that China is making deals to not use any U.S. dollars in their transactions. If the Fed decides that maintaining our status as the global reserve currency is the most important element of all, then they will need to remove all stimulus and stop the printing completely. This would mean:
- The ‘Too Big to Fail’ banks – would fail,
- The stock market would fall well under DOW 10k, and
- No more bailouts to Ponzi scheme mortgage companies.
It would be a total and complete change of policy that would create some of the worst volatility in the modern era. You just don't inflate the world with bogus dollars, realize that it didn't work, and then yank them all back out – without huge disruptions.
Because choice number two (saving the U.S. dollar) means doing a complete reversal of everything the Fed has done for 15 years, I find it hard to believe they would finally ‘find religion’ and do the ‘right thing’ from here on. Therefore, what makes the most sense to me is that after some additional ‘pain’, the Fed halts the tapering and starts to re-inflate. But I think the pain level needs to be significantly higher than a 5% reduction in the DOW and an emerging market currency fiasco. Potentially after the Fed’s next taper leads to an outright currency crisis, the DOW spiraling lower, and the economic data getting uglier – the Fed will then realize that they’ve created a monster that they can’t reign in and will resume printing. At least that’s been the Fed’s M.O. for the past 5 years.
In the meantime, the market action tells us that the taper has more effect on things than the ‘experts’ have told us. Even on Friday, the markets fought off a 240 point DOW drop to end down 150 points. January 2013 was the worst month in a long, long time. With any ‘new month’ comes ‘new money’, and it wouldn't be unreasonable to see the market bounce in the beginning of February. But as the Fed replaces their taper money, this market’s trend is probably going to be sideways and down.
I’m still not comfortable buying the stock indexes at these levels. But (at the same time) I remain shy of shorting this market.
- I still like the metals here as a hedge = Gold (GLD) and Silver (SLV).
- I also like any group of stocks that can remain positive in this market – and that group is the Bio-Techs, including names like: GILD, INCY, CELG, REGN, and BIIB.
- In particular I like 3 stocks: FEYE, QIHU and TSLA. FireEye (FEYE) and QIHU are both in the cyber-security space, while Tesla (TSLA) is the electric carmaker that wants to move higher in the worst way.
My current short-term holds are:
- FEYE – March ’14 $50 Calls – in @ $11.50 (currently $24.00)
- TSLA – Feb ’14 $165 Calls – in @ $12.47 (currently $18.80)
- QIHU – March ’14 $110 Calls – in @ $5.93 (currently $6.66)
- USO – April ’14 $37 Calls – in @ at $34.51 (currently $34.95)
- FXY – March ‘14 $97 Puts – in @ at $96.47 (currently $95.61)
- SIL – in at 24.51 (currently 11.98) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 119.96) – no stop ($1,245 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.47) – no stop ($19.20 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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