This Week in Barrons - 3-30-2014

This Week in Barrons – 3-30-2014

Being Prepared – For those Rainy Days to come.

What do we do if that ‘light at the end of the tunnel’ turns out to be the light of an on-coming train?  Economically that could be: a war breaking out over the Ukraine, the final collapse of the global economic system, a dispute between North and South Korea, or even an economic battle between Japan and China.  To me, something feels like it’s coming our way fairly quickly.  It brings me no pleasure to think about these things, but you must admit, things (at the global level) are not going well.  The chances of something substantial taking place are indeed rising.  These types of ‘out of the blue’ events are termed ’fat tail’ events.

Do my ‘fat tail’ events include:

-       Agenda 21 groups that want total control of the earth? No.  They have been around for 60 years and their advances have been incremental – Trilateral think tanks, Global warming initiatives, etc.

-       The UN elites that want everyone’s wealth to be equally distributed?  No.

-       Increasing our daily intake of Socialism?  No.  When I look at Norway, Sweden, Denmark, New Zealand, Ireland, and Belgium (potentially the most socialistic countries on Earth) – the people there live pretty darned well and in many cases better than we do.

My ‘fat tail’ events do include:

-       A hedge fund that blows up, and results in a derivative implosion – that cascades into a global financial shutdown,

-       A well placed dirty bomb going off in a major city,

-       A global currency reset,

-       A collapse of our power grid, or

-       A shooting war that escalates into the first small, nuclear exchange.

I think that these are the types of events that we have a possibility of experiencing in the not too distant future.  These events are rather short-term in duration, and would take only months to repair.  For example a recent report showed that just 9 well-placed bombs would take our power grid down for 2 to 3 months.  My question is: How should we prepare ourselves monetarily?

#1 CASH:  Most people suggest having 6 months of cash on hand to pay your expenses.  These expenses would be: mortgages, rents, car payments, food, and utilities.  I would exclude mortgages, rents and car payments from this amount.  If the banks go down over a cyber attack, or a global crash, no mortgage companies are going to be knocking at your door demanding payment.  The same is true with auto loans.  Therefore, I simply want enough cash on hand (a few thousand dollars) to pay for food, water and utilities.

#2 GOLD & SILVER:  Let’s consider the purpose of gold and silver.  I'm not looking for an end of civilization solution, as much as I am a ‘stop-gap’ solution until things are ‘up and running’ again.  Regular U.S. dollars buy us a few months, but what if the problem is bigger than that.  What if the reason our financial system collapses is because the U.S. dollar went to ‘heck in a hand basket’ and nobody wants them any more?  That is when having some silver and gold on-hand, makes sense.  I would figure on 100 silver, one-ounce coins, along with 4 ounces of gold in one-tenth ounce coins, and one-quarter ounce coins.  (FYI: one-ounce coins are fantastic for wealth preservation but impractical for buying fruits and vegetables from farmers.)

No one wants to think about the ugliness that’s out there, but in this case – a few ‘ounces’ of (gold and silver) prevention – are truly worth the cure.

The Market:

Be careful what you wish for.  Last Sunday I suggested that the upcoming week was going to be a sideways chop, and that was pretty much spot on.  After 5 trading days where we saw intra-day moves of 200+ points up and down, we ended the week with the DOW up 13 points from where it started.  That's a lot of volatility with very little to show for it.

The question of course is "What now?"  As I watch the global train wreck unfold, I can see some interesting and bizarre developments:

-       On Wednesday, someone made a $200 Million dollar bet that the S&P is going to head considerably lower. That's a big bet.  What do they know?

-       Earlier in the week, Russia (indirectly) sold $100 Billion in U.S. Treasuries to Belgium.  How can a country with the GDP the size of Texas afford to purchase $100 Billion of U.S. Treasuries?

-       Our FED (despite telling us that they’re Tapering QE) is still purchasing all of the Treasuries that no one else wants to buy.  Let’s face it; we're in a world of hurt when our FED lies to us about what they’re doing.

I think that the entire global balance of power is shifting.  Russia and China could easily unite as a trading partner – one for its energy and raw materials, and the other for its work force.  A couple questions come to mind:

-       Are the Europeans really going to side with the U.S. when Russia diverts and sells their natural gas and oil to China instead?

-       Are any of the leading nations (other than Japan) going to buy U.S. Treasuries when China announces full convertibility of their Yuan later this year?

-       What happens to the value of the U.S. dollar when the oil producing nations decide that they'll accept Rubles, Yuan, Yen, and Real's and not solely the U.S. dollar?

What happens to the stock market – because (after all) that’s what most people care about?  The good news is that our FED can maintain the illusion of prosperity for a long time.  Honestly, our government has proven that they cannot create jobs or housing demand, but they can push the stock market higher.  The issue isn’t their desire, but rests solely on their ability.  The FED can print $20 Billion a day (that they wouldn’t record), and hand it to select accounts to simply buy stocks.  Who would know?  The FED just can’t let it be so ‘in your face’ that even the average J. Q. Public gets wind of what they’re doing.

I think the FED will push our markets higher for the next two months.  I think by June, we will hear more deals concerning a Russia – China alliance.  And it’s then in June when we can see the markets finally roll over.  Between now and then, I see choppy trading and at least one more attempt to break through to the all-time highs.

On Monday we have the last day of the quarter, and on Tuesday we have a new month and quarter.  These are historically stronger market times as pension funds, insurance funds, and payroll deposits flood into the fund managers – and they (in turn) put those funds to work.  Therefore, next week I would expect to see a rising market.  After that, we will be running into earnings season and things will become choppy again.

Many of you have asked about Gold and silver, and with everything going on globally – Why aren’t they rising like crazy?  The answer is simple: Because the FED doesn’t want them to rise.  Remember; don’t use gold and silver for trading.  Use gold and silver as vehicles to protect some of your wealth.  I have never purchased gold or silver with the intent of seeing it increase $10 and sell it for a profit.  Gold and silver are designed to be a ‘long-haul’ defense against inflation, and safety that they provide in the event of a horrible situation.  Did you see the news?  Food prices have risen 19% in 2014 – that’s 19% in 3 months!

Is gold trading where it should be?  No.  Is silver trading where it should be?  No.  They are the two most manipulated commodities on earth, but that won’t last forever.  Don't let the short term chop drive you crazy.  Don't trade the metals - accumulate them.

Tips:

There is an interesting event brewing with MannKind Pharmaceuticals (MNKD) – a company who’s owner has put in $1B of his own money – on a new delivery / medication to help control diabetes.  They go before the FDA advance committee on Tuesday (April 1^st) asking for their blessing.  The FDA ruling will then come around the middle of the month.  Financially, this presents an extremely interesting opportunity:

-       The stock is selling for $4.83 / share

-       The weekly $5 calls are paying $1.20 / share = a 24% premium for a week!

-       The weekly $5.50 calls are paying $0.95 / share = a 17% premium for a week – not including a 12% stock appreciation (the stock moving from $4.83 to $5.50)

-       For example:

o   You purchase 100 shares of MNKD for $483,

o   The stock doesn’t move at all, but rather remains @ $4.83 / share for the week,

o   You could sell the $5 calls for $120 this week,

o   And after 3 more weeks of doing the same – have accumulated $480 in premiums – that would have effectively paid for the stock.

o   Or looking at it a different way, it buys you 24% of downside protection.

aMy current short-term holds are:

-       MNKD – in @ $5.13 – currently ($4.83)

-       USO (Oil) – in @ $34.51 - (currently $36.62),

-       UCO (Oil) – in @ $28.75 – (currently $34.61),

-       TLT (Bonds) – in @ $107.10 – (currently $109.34),

-       SIL (Silver) – in at 24.51 - (currently 12.92) – no stop,

-       GLD (ETF for Gold) – in at 158.28, (currently 124.68) – no stop ($1,294 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 19.08) – no stop ($19.87 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there!

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

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>

This Week in Barrons - 3-23-2014

This Week in Barrons – 3-23-2014

Cook Those Books!

On Monday, the Ukraine held their referendum vote, and the majority voted to be a Russian Federation satellite.  That prompted Obama to place some sanctions on several Russian officials.  The market then proceeded to gain 200 points just because these were not really ‘sweeping’ or serious sanctions.  I then turned on CNBC and found out that the market was up because we were probably looking at a 5% U.S. GDP increase, and our economy was much stronger than the winter numbers had suggested.  For years our economy has been mired in a recession, and we’ve had to ‘cook the books’ in order to get anywhere close to a 2% GDP increase.  But I wondered:  Why isn’t anyone talking about how we actually could see 5% GDP growth?  You see, in mid to late 2013, the Bureau of Economic Analysis (BEA) announced a change in how they will calculate Gross Domestic Product (GDP) going forward.  They modified how money spent on research and development (R&D), and how money spent on the production of ‘intangible assets’ like movies, music, and television will be accounted for within the GDP calculation.  The new methodology declares these expenditures to be ‘investments’ and immediately allows them to increase GDP by (in most economists estimates) approximately 3%.  This ‘cooking of the books’ will lead to the perception of faster growth.

In the past, business spending on R&D (a portion of which comes in the form of salaries) has traditionally been considered an expense that does not explicitly add to GDP.  However, that all changes with the new methodology.  Also the cost of producing television shows, movies, and music will also count as investments that add directly to GDP.  Thirdly, under the new system, government pension additions to GDP will be calculated not from actual contributions (as in the past), but from what our government has promised.  For example: under the old system, if a state had a $10,000 pension obligation but only contributed $1,000, only the $1,000 would be added to GDP.  Under the new system the entire $10,000 would be counted.  So now a government can ‘magically’ grow the economy simply by making promises they cannot keep.  Talk about ‘cooking the books’ – best stir the pot because the sauce is thickening.

Factually – this week:

-       Housing sales and consumer sentiment declined 6%,

-       Mortgage applications fell to 20-year lows, and ‘first time home buyers’ fell to 10-year lows,

-       Auto sales are declining as manufacturers are pushing cars to dealerships that they don't want,

-       With the resurgence of the automobile ‘sales at all cost’ philosophy – over 60% of auto purchases involve ‘sub-prime loans’,

-       China started to ‘crack down’ on credit due to a Chinese Real Estate developer that defaulted on a $3.5B note,

-       Poland transferred private pension $’s into their own general fund in order to reduce their debt,

-       Italy’s largest bank defaulted on half-a-billion tier one bonds,

-       Spain’s unemployment rate hit 56%, and

-       Corporate ‘Insiders’ sold 69 TIMES more stock than they purchased.  It’s the fastest ‘Insider’ sales rate in history.

Let me review that last statistic.  Last week corporate ‘Insiders’ BOUGHT $37.8 Million worth of their own company’s stock, but SOLD $2.6 Billion worth.  They sold 69 TIMES more of their own company’s stock than they bought.  This has been going on for months.  Corporations (with borrowed funds) are buying back their own company stock, thereby pushing the stock price higher.  When the stock prices are this high, these same ‘Insiders’ are selling their own holdings in the company.  Now, if the guys that are running the companies don’t want their own stock, why should we?

Unfortunately, you can only ‘cook the books’ for so long, until someone asks: “Is it soup yet?”  Honestly, I think we’re close to it all boiling over.

The Market...

This week was Federal Reserve week.  Ms. Yellen said:

-       The labor force participation rate was larger than she expected.  Really?

-       The weather was responsible for the lousy economic reports.  Honestly?

-       Asset purchases (the Fed’s Quantitative Easing) would end by the Fall of 2014.  Wow!

-       Interest Rates will increase 6 months after asset purchases end.  Double Wow!

This rattled the markets.  The ONLY reason our markets are at these levels is because the Fed is feeding our banks billions to buy assets and stocks.  But honestly, that's small potatoes.  The Fed has changed its M.O. (modus operandi).  Their M.O. has always been to flood the system with money, not to worry about inflation, and do whatever it takes to ‘save’ things.  The Fed now appears to be trying to ‘prop-up’ the U.S. dollar, while allowing the economy to fade.  Something major has changed in the Fed’s agenda.

If the Fed is going to remove their portion of the punch bowl, then the only ‘free money’ remaining is in the Yen ‘carry-trade’.  Without going into the details of Yen ‘carry-trade’, simply watch the FXY (an ETF that tracks the value of the Yen).  If the FXY increases, it means that the ‘carry trade’ amount is going down, thereby reducing the only remaining supply of free money, and correspondingly reducing the value of stocks in general and the S&P index in specific.  Therefore, if the FXY were to suddenly jump higher, it could create a ‘short covering rally’, and cause a lot of the mutual funds and ETF’s that shorted the yen to scramble and cover – causing the ‘carry trade’ to virtually end.

Previously, I was in the camp that thought that the Fed would reverse its QE reduction program.  I also thought that they might launch a totally new program, designed to push billions into the system.  But something feels different this time around.  I'm getting NO hints at all that the Fed is willing to slow the tapering, reverse it, or even replace it.  I tend to think that many on Wall Street still believe that this is all show by the Fed, and at the first sign of real panic the Fed will rush back in and save us.  But that flies in the face of the fact that the Fed started this taper in the face of weakness.

Take Friday’s market behavior for example.  On Friday things were going along swimmingly with the DOW up 125 points until the Federal Reserve participants Mr. Fisher and Mr. Bullard reinforced Ms. Yellen’s claims about tapering to zero by October 2014.  They then tried to define a time line when they would actually increase interest rates.  Immediately the market’s thinking changed, and the DOW plunged from being positive by 125 points to being negative by 30.

This is a very confusing time.  Our #1 marketplace – housing – is not in good shape.  First time home buyers are completely shut out, because their $1 TRILLION in student loan obligations are preventing them from taking on a home mortgage.  Therefore, homes in the $90k to $250k price-range are NOT selling.  The expensive properties are selling due to the 5-year rising stock market and the corresponding wealth effect.  But the ‘first time home buyer’ has always been the driver of this sector, and without their participation any housing rally is unsustainable.  With this as a backdrop, how can the Fed be telling us that interest rates will rise after October 2014?  If people can't buy a home now, how can they ever afford one if the interest rates increase?  Something quite odd is going on.

The market (after putting in a new intra-day high on the S&P Friday morning) faded back and ended the day slightly red.  Any time a market is trying to exceed an upper resistance, it takes a lot of effort to move past.  Usually it takes a few attempts in order to succeed.  Unfortunately, now the markets have to question whether the Fed is really going to ‘have their backs’ and rush in with more funds when things get extended.  Thus far, the Fed is saying ‘No’ – leaving only the Yen ‘carry-trade’ to take us to glory.

The market feels tired.  For example, on Thursday – the day the market recovered all of Wednesday’s losses – more stocks declined than advanced.  The rally is becoming narrower, and you can see that it’s struggling.  However, we've been in this exact position a dozen times in the recent past and somehow the market just finds the will (and the money) to push forward.  You almost expect it now, and that’s a very dangerous thought.  I feel (going forward) that we're going to see some sideways chop as the market tries to muster the resources to break through the highs.  I could easily see a week of up and down - tighter range movement – with a bias toward the downside.  I feel that there is more downside pressure on this market, than there is upside ability. 

Tips:

As ‘Insiders’ continue to sell (including FEYE), this week I was stopped out of FEYE for a tidy profit.

Last week, I received some questions via e-mail asking me to further detail my DUST / NUGT trading plan.  I would be glad to.  NUGT and DUST are leveraged ETF’s that focus on the precious metals (gold and silver) mining space.  The ETF’s are designed to mirror each other’s actions – meaning as one goes up the other goes down virtually the same amount.  Let’s assume you have $100,000 to invest, and based upon Friday’s prices near the end of the day – here’s how I would construct the trade:

-       DUST was selling for $21.10 per share.

-       I would purchase 1,900 shares of DUST for $40,090.

-       The standard deviation (expected move) in DUST for the coming week is $2.16.

-       Therefore, the highest the ETF is expected to move is ($21.10 + $2.16) $23.26.

-       Rounding up (to give ourselves a little cushion), the $23.50 calls are selling for $0.35 each.

-       I would SELL 19 calls @ $0.35 each – (each call option covers 100 shares / and we purchased 1,900 shares = 19 call options) = earning us: $665.00.

-       NUGT was selling for $44.44 per share.

-       I would purchase 902 shares for $40,084.88 to mimic the $40,090 spend on DUST.

-       The standard deviation (expected move) in NUGT for the coming week is $4.70.

-       Therefore, the highest the ETF is expected to move is: ($44.44 + $4.70) $49.14.

-       Rounding up (giving ourselves a little cushion), the $49.50 calls are selling for $0.70 each.

-       I would SELL 9 calls @ $0.70 each – (each call option covers 100 shares / and we purchased 900 shares = 9 call options) = earning us: $630.00.

-       This week, I would calmly (sit on my hands) and watch those call options expire worthless – pocketing their complete sale amounts of: $630 +  $665 = $1,295.00

-       $1,295, divided by a total investment of $80,175 = 1.6% per week = an 84% per year annual increase by repeating this process each and every week!

-       Now – we only invested $80k of the $100k – simply because the numbers worked out fairly cleanly this way.

I hope that details the trade, and any other questions – please don’t hesitate to ask.

My current short-term holds are:

-       USO (Oil) – in @ $34.51 - (currently $35.84),

-       UCO (Oil) – in @ $28.75 – (currently $33.21),

-       TLT (Bonds) – in @ $107.10 – (currently $108.46),

-       SIL (Silver) – in at 24.51 - (currently 13.50) – no stop,

-       GLD (ETF for Gold) – in at 158.28, (currently 128.44) – no stop ($1,334 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 19.57) – no stop ($20.30 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there!

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

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>