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.
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.
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 1st) 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!
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Until next week – be safe.