This Week in Barrons – 5-18-2014
Rain, Rain Go Away:
To highlight the fact that much of the country is drowning in spring rains – S.F. contributed the following:
God: In the year 2013, the Lord came unto Noah and said: “Once again, the earth has become evil. Build another Ark and save 2 of every living thing along with a few good humans. Here are the blueprints and you have 6 months to build the Ark before I will start the unending rain for 40 days and 40 nights.”
God: 6 months later, seeing Noah weeping in his yard – but no Ark, said: “Noah! I’m about to start the rain! Where is the Ark?”
Noah: “Please forgive me Lord, but things have changed. It seems that:
- I needed a building permit
- And I’ve been arguing with the Boat Inspector about the need for a sprinkler system.
- My neighbors claim that I’ve violated the Neighborhood By-Laws by building the Ark in my back garden and exceeding the height limitations.
- Then the local Electric Company demanded compensation for the future costs of moving power lines and other overhead obstructions, to clear the passage for the Ark’s move to the sea. I told them that the sea would be coming to us, but they would hear nothing of that.
- Then there was a ban on cutting local trees in order to save the Greater Spotted Barn Owl. I tried to convince them that I needed the wood to ‘Save the Owls’ – but no go.
- Then when I started gathering the animals the ASPCA insisted that I was confining wild animals against their will. The said that the accommodations were too restrictive, and it was cruel and inhumane to put so many animals into a confined space.
- Then the EPA (Environmental Protection Agency) refused to grant me passage until they conducted an environmental impact study on your proposed route.
- The Human Rights Commission filed a petition on my needing more minorities for my building crew.
- Immigration is still checking the Visa status the individuals that are working with me.
- The Trade Unions say that I can’t use my sons – as they are non-union.
- And the IRS (Internal Revenue Service) has seized all of my assets, claiming that I’m trying to leave the country illegally with endangered species.
- So forgive me Lord, but I think that it will take me at least 10 years to finish this Ark.”
God: Suddenly the skies cleared, the sun began to shine, and a rainbow stretched across the sky.
Noah: Looking up in wonder asked: “You mean you’re not going to destroy the world?”
God: No, clearly the Government has beaten me to it.
Factually this week:
- Industrial Production unexpectedly dropped in April. Output at factories, mines and utilities decreased by 0.6%, while manufacturing alone decreased 0.4%.
- Confidence among U.S. homebuilders dropped in May to the lowest level in a year. This tells us that the residential real estate market may be slow to recover after an unusually harsh winter. Tight credit conditions, limited availability of lots and falling affordability as home prices rise are preventing the residential real-estate market from gaining momentum.
- As Wal-Mart missed top and bottom line financials last week, the sales of ultra-high end homes have never been better. Registered sales have climbed from $85M to over $149M – for a single family home.
- Inflation came in ‘hot’ this past week at over 0.3% per month. The reality is that inflation is over 9%, but having the government admit to something > 2% is a step in the right direction.
- David Tepper (the brash billionaire hedge fund owner) spoke at the SALT conference this week and said that that he liked Apple long, the Russell 2000 Index short, and urged attendees: “It’s not time to go all short, but don't be too friggin’ long either."
In the beginning of the week, the market’s tolerance for ignoring bad news was high:
- Every report out of China missed estimates to the downside,
- Germany's ZEW report crashed for 10 whole points,
- And the U.S. retail sales figures (which were supposed to be growing like weeds after the winter’s "weather" excuse) came in up a paltry 0.1%. And if you took out gasoline sales – then retail sales actually declined.
But on Wednesday the wheels of the market began to come-off and we closed down 101 DOW points and 9 S&P points. We lost the all time highs, and also lost the 50-day moving average on the XLF (which is the financial sector). Neither of these are bullish indications. While one day does not a market make, we have high global tensions, bad economic reports, ugly earnings, and ‘Sell in May and Go Away’ hanging over our heads.
Thursday turned out to be even more ugly than Wednesday. We dropped like a rock coming out of the gate, and at one point were down 234 points. The shorts covered some by the close, but we still lost almost 170 DOW points. The key was the 50-day moving averages. Both major indexes used their respective 50-day moving averages as support, and bounced higher off of them. That's important, because market technicians need visible levels of support.
If the DOW and/or the S&P lose their 50-day moving averages, they can fall a long way before their next really solid support level. So, we need to watch those levels. And, each time these levels are defended, the defense becomes tougher and tougher to manifest. After all, retail sales are not that encouraging. Of the 51 retailers that have announced earnings thus far, they are DOWN an average of almost 4% under last year. And the pseudo housing recovery is dead. Rental units are all that is being built.
No matter where I look, you can make the case for this market finally giving up the ghost. However, we've seen this movie before. All I can do is follow the numbers. If the numbers fail their 50-day moving averages – it’s time to get seriously cautious. If the market pushes back up to it’s old highs and gets rejected – it’s time to get seriously cautious. In between those levels, we can chop around for days and even weeks.
We ended Friday with a show of bravado with the DOW gaining 45 points. If nothing goes ‘bump in the night’, I think we will run higher early in the week and attempt a ‘break-out’. However, if this ‘break-out’ fails, we could finally ‘break-down’.
Congrats to those of you who were with me on the TLT trade. We cashed in those calls at $114, for a 1.5 week – 100% gain. I will dive back into TLT around $112. TLT has been (for the past 6 months) one of those 5 days on – 5 days off types of trades. That means I purchase at the bottom of a channel and (approximately 4 to 5 days later) I sell when it reaches the top of its channel. I then wait for another 4 to 5 days – when it drifts to the bottom of the channel – and then I buy again.
Double congrats to those of you sticking in the MNKD trade as it gained over 10% last week. A new pharma play has emerged: DRTX. It has a drug receiving FDA approval on or around May 26th, 2014. And it also has a nice 10% monthly covered call yield – coupled with a 9% upward move in the stock. So if you DO get called out of the stock, you will have accumulated close to a 20% gain in one month.
I also continue to like the small cap energy sector, and specifically stocks such as: BXE, FET, FPP, HK, PFIE, HTM, PQ, and VTNR.
Finally, I’m a buyer of Gold (GLD), Silver (SLV), and NUGT at these levels.
My current short-term holds are:
- MNKD – in @ $6.35 – (currently $7.02), w/ 2% weekly Covered Call Yield,
- TLT – out @ 114 – will be back in July Calls around $112,
- USO (Oil) – in @ $37.19 - (currently $37.23),
- BXE (Oil) – in @ $9.11 – (currently $9.19),
- DRTX (Drug) – in @ $13.67 – (currently $15.93), w/ 10% Covered Call Yield,
- FET (Energy) – in @ 30.42 – (currently $32.52)
- FPP (Oil) – in @ $5.32 – (currently $5.17),
- HK (Energy) – in @ $5.25 – (currently $5.79),
- HTM (Energy) – in @ $0.75 – (currently $0.66),
- LSCC (Tech) – in @ $7.85 – (currently $8.13),
- NGLS (Nat Gas) – in @ 60.11 – (currently $64.00),
- PFIE (Energy) – in @ $4.47 – (currently $3.96),
- PQ (Energy) – in @ $5.69 – (currently $5.89),
- RFMD (Tech) – in @ $7.96 – (currently $8.79),
- VTNR (Energy) – in @ 7.02 – (currently $7.40),
- SIL (Silver) – in at 24.51 - (currently 12.05) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 124.50) – no stop ($1,293.50 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.61) – no stop ($19.39 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.