This Week in Barrons – 3-9-2014
Ukraine is giving me the Jitters:
While watching a certain financial TV channel, I often need to smile – because it seems that guests are absolute experts in virtually any topic that gets thrown at them – including the following graph. It’s a scary parallel isn’t it? It’s no longer a question of ‘IF’ history repeats itself.
However, this week’s topic is the Ukraine. I listened intently to reporters, analysts, and CEO’s tell me about Russia, Putin, the Ukraine, Ukrainian economics, military strategy and a host of other topics. I always ask myself: What makes these people think they are experts? And I wonder how much of this is pure propaganda?
I am not an expert on the Ukraine, but I do know that virtually every student from the age of 7 onward can tell you about the "Nazi Holocaust". Yet virtually all of those same students have NO idea that Russia (during the winter of 1932-33) starved and killed over 10 million Ukrainians (on Ukrainian soil), and that Stalin killed over 30 million more throughout Russia. It stands as the single largest human holocaust of all time.
I wonder if those reporters, analysts, and CEO’s:
- Understand the behind-the-scenes maneuvering that our State Department official (Victoria Nuland) was doing with our U.S. Ambassador to the Ukraine, (Geoffrey Pyatt) to try and get ‘our guy’ into the Ukrainian seat of power?
- Know that WE (the U.S.) provoked the rebellion, and attempted to install our own ‘puppet government’.
- Realize that new revelations suggest that the people killed by ‘Government snipers’ were actually killed by the protestors with the goal of blaming it on the former Ukrainian government to create more international support.
- And comprehend that we are doing our best to label Putin the monster
The Ukrainian fiasco reminds me very much of the Cuban missile crisis of my youth. After the U.S. had placed nuclear missiles aimed at Moscow in Turkey and Italy, and after the U.S. failed to overthrow the Cuban regime, in May of 1962 – Nikita Khrushchev proposed the idea of placing Soviet nuclear missiles in Cuba to deter any future invasion attempts. During a meeting between Khrushchev and Fidel Castro in July, a secret agreement was reached and construction of several missile sites begun. The U.S. considered attacking Cuba via air and sea, but decided on a military blockade (a ‘quarantine’) for legal purposes. Under the ‘quarantine’ the U.S. would not permit offensive weapons to be delivered to Cuba, while demanding the dismantlement and return of Soviet weapons back to the USSR.
The Kennedy administration held only a slim hope that the Kremlin would agree to their demands, and expected a military confrontation. These fears were underpinned by the October 24, 1962 letter by Soviet Premier Nikita Khrushchev to President John F. Kennedy, in which he stated that the U.S. blockade of "navigation in international waters and air space" constituted "an act of aggression propelling human kind into the abyss of a world nuclear-missile war". However, in secret back channel communications the President and Premier initiated a proposal to resolve the crisis.
You see, the Russians were going to build a missile deployment center in Cuba and our Government was not going to allow such a thing just 90 miles from our coast. Sound familiar? When the U.S. provoked the uprising in the Ukraine that overthrew the standing Ukrainian Government, it confronted Russia with two major problems:
- (1) If the Ukraine were to go ‘Pro EU/US’, there would be a real possibility of some form of NATO military outposts being placed very close to Russia's border. That would virtually copy Russian missiles being placed in Cuba.
- (2) Crimea (a portion of the Ukraine) is home to Russia's Black Sea Fleet. The Russian military took up residence in Crimea more than 200 years ago, when Catherine the Great built a naval base at Sevastopol. After the dissolution of the Soviet Union in 1991, Russia and Ukraine tussled repeatedly over dividing up the Black Sea Fleet based there, but never came to an agreement. Today, Russia rents its Sevastopol base from Ukraine, and will never let that base be shut down or overtaken.
Why is it that we (the U.S.) help to start these kinds of uprising over and over again, and then attempt to blame someone else when it goes to ‘heck in a hand-basket’? If the Ukrainian people want to abandon Russian authority and/or rule, then they should have honest elections, and let the people decide. Instead we help stir up violent protests with people being shot, beaten and burned, only to have Russia come in and protect its interests, and then we attempt to blame Russia.
The one real ‘sticking’ point in all of this is the existence of a bilateral agreement (signed in 1994) between the U.S., Britain and the Ukraine where we all vowed to come to the defense of the Ukraine if their borders were ever attacked. Therefore, in truly technical terms, a military action in the Ukraine by Russia ‘demands’ that we respond militarily. So, what we are seeing play out is either stupidity or insanity, because a military war with Russia cannot be won.
And finally, as China and Russia become increasingly friendlier, together they own 28% of our (U.S.) outstanding debt. Any agreement between them to start ‘dumping’ U.S. debt on the markets would grind us to a halt in hours. Yes, it would hurt them too, but one day they will own all the gold they will need to survive the ‘paper dollar’ beating that they would take by ‘dumping’ Treasuries and it will be ‘lights out’ for us. They realize that they hold the ultimate trump card. In response to President Obama's suggestion for Russia to back down (otherwise sanctions could be imposed) the Russian presidential advisor, Sergei Glazyev said: “Authorities should dump U.S. Government bonds in the event of Russian companies and individuals being targeted by sanctions over events in Ukraine. We hold a decent amount of treasury bonds (more than $200 billion), and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner, and we will encourage everybody to dump U.S. Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S. market." He went on to suggest that: “if U.S. sanctions are imposed, then Russian companies would not repay the debts that they owe U.S. banks." Now Russia's $200 Billion wouldn't completely cripple our treasury markets, but add in some of China's $800 Billion and we are suddenly in a ‘world of hurt.’
This Friday is setting up as a ‘drop dead’ day, as that is the date of the vote by the Crimean citizens to secede from the Ukraine, and to presumably become a part of Russia. The majority of citizens in Crimea are pro-Russian so this could trigger all kinds of fireworks, as we get closer to the end of the week. Things would have to get pretty stupid for us to actually have a military response and escalation. That said, you just witnessed how close and how easily this could escalate, and it would have NO winners. Stay safe out there.
On Friday we received the non-farm jobs report. Thus far every bad economic report has been blamed on the weather. The jobs report was estimated to be 139k of new hires, and it came in (better than estimates) at 175k. Which raises the question how could hiring be so robust (in this bad weather), if we couldn’t sell goods and services? [Factually – 124k of those 175k jobs (71%) were ‘made up / fake’ jobs – contributed by the ‘Birth/Death’ model.] I realize that I’m being a bit cynical here, but please – ‘the spin’ is just so ‘in your face’ concerning the economy that you have to poke fun at it. If a company misses earnings, sales forecasts, etc. – it’s blamed on the weather. But a better than expected jobs report and suddenly it’s the ‘recovery taking hold.’ Oh – and on Friday right after the jobs report – The Gap (retail stores) reported that their same store sales fell 7%, and they blamed the weather. But Footlocker (shoe stores) reported a sales increase of 3%. I guess it doesn’t snow on shoe stores?
SF and I discussed over the weekend the most recent CBO (Congressional Budget Office’s) report concerning the TARP Program. Congress authorized a $700 Billion rescue in October 2008. TARP (which spent more than $400 Billion to stabilize banks such as Citigroup and Morgan Stanley, and companies including American International Group and General Motors) will ultimately cost the taxpayers $21 Billion. It will not be a ‘profitable’ venture as some reports have previously suggested.
Educationally, this week there was a decision to re-do the SAT tests for getting into college. While the ‘company line’ is that the re-do will open more doors for more people, and allow more people the opportunity to get a chance to get into college. What the re-do really does is lower the bar for admission. Factually:
- (1) Over half of our current high school graduates wouldn’t have made it past the 9th grade 50 years ago,
- (2) Colleges need the $20 to $40k per year per student they will get from people who go into debt putting their children through college, and
- (3) We can't have college enrollments fall due to people not being able to pass the admission tests!
As the market flirts with all-time highs, and I see the reality of what America has become, I continue to shake my head. If I ever thought that the 1998 - 2000 ‘Internet’ market run was based on false hope, which clearly was just the warm-up pitcher for this market’s performance. The correlated assets continue to diverge but the markets continue to plow ahead.
However, the market head winds this week will be the Ukraine. The vast majority of what I read describes Putin as needing to expand his empire, but honestly Putin did what any ‘good’ leader of his country would do – he immediately secured the safety of the borders for his country. That meant securing Crimea. Does Putin want the remainder of the Ukraine as many are suggesting? While there's potentially some nostalgia running through Putin’s veins for that territory and millions of Russians (loyal citizens) living there, I think he’s content having a satellite buffer with mixed loyalties.
I have to assume that there will be NO military action – unless stupid people do insane things. But the smokescreen out of the Obama administration concerning inflicting damaging sanctions is just that. The rest of the world is indeed tired of being controlled by Washington, and has been developing countermeasures to prevent Washington from shutting them down economically. They've devised computer viruses that can disrupt our markets, and our banking systems. They've created channels where they could ‘dump’ our Treasuries and refuse payments on obligations. In other words, the U.S. could impose sanctions on Russia, and Russia would come right back with it’s own brand of economic warfare. The result would be that both sides would be wounded. I’m guessing we see more huff and puff, but in the end, the real outcome will be a stand down, and a ‘sweep under the rug’. But beware of the posturing to come.
The market is still striving for the last all time high to be exceeded, and (depending upon the Ukraine) the DOW should be on track to do that early this week. We are in a bubble and there’s no telling how far this bubble will inflate. All we can do now is continue the ride – making sure to jump off before the wheels come off. Be cautious – and aware of the parallels between our current market and the stock market crash of 1928-29 illustrated below. Could history repeat itself? In my view – it already has.
This week I exited QIHU before earnings for spectacular profits. And we got back into playing the NUGT / DUST combination. These are two leveraged ETF’s that are focused around the gold and silver mining industry. The ETF’s are designed to virtually off-set each other – meaning as one goes up the other goes down virtually the same amount. Therefore, it’s somewhat of a natural to:
- Purchase equal dollar amounts of each ETF,
- Sell – close to the money calls on each ETF at a very accommodative return rate, and
- Watch the calls expire worthless – pocketing their complete sale amount.
FireEye (FEYE) issued more stock which brought their stock price down and gave us yet another buying opportunity, along with a directional call play. This coming week I’ll be enhancing my position on TLT (the bond ETF) and a couple oil ETF’s – UCO and USO in anticipation of the Ukrainian dilemma.
My current short-term holds are:
- FEYE – in @ $75.50 – (currently $81.63)
- USO (Oil) – in @ $34.51 - (currently $37.06)
- UCO (Oil) – in @ $28.75 – (currently $35.05)
- SIL (Silver) – in at 24.51 - (currently 14.05) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 129.29) – no stop ($1,339 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 20.20) – no stop ($20.90 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.