This Week in Barrons - 5-25-2014

This Week in Barrons – 5-25-2014

The Problem with Roaches is:  There’s Never Just One:

There's an old saying that if you see one roach, you're infested.  Why?  Because they are prolific breeders and can multiply in amazing numbers.  While they are disgusting little creatures, they are indeed incredible survivors, and impossible to control.

So, why talk about roaches?  Every day actions are being taken by foreign nations to rid themselves of U.S. dollars.  Every day there are alliances, pacts, contracts and deals that are being created in which the U.S. is NO LONGER a part.  Each one of these deals takes a small bite out of the U.S. economic supremacy that we fought so hard to attain.  The war is being won by the East and lost by the U.S. – very rapidly.  A few examples announced last week:

-       Russia plans to build 8 nuclear plants for Iran.  (No U.S. dollars are involved.)

-       Russia plans on supplying natural gas to China for the next 30 years.  (Every payment methodology being discussed does NOT include U.S. dollars.)

-       China plans to build a high-speed rail line (carrying passengers and industrials) for Kenya (No U.S. dollars are involved.)

-       And China signed an additional 15 agreements within Africa for over $11 Billion dollars for infrastructure improvements.  (No U.S. dollars are involved – an exchange for natural resources is being contemplated.)

This summer the BRICs will launch their version of a development bank.  China and Russia are the major players, but it isn’t just the headline names (Brazil, Russia, India and China) that are going to be involved.  Argentina, Qatar, Iran, Vietnam and Mexico are also joining the fold.  The U.S. was not asked (nor will it be asked) to be a part of this development bank.

In India the recent elections have brought in the Modi regime.  The regime has promised many modifications to name a few: (a) They said that they would do away with any gold surcharges that the last administration put in place in order to try and limit gold sales.  (b) They are pro business, and therefore can expect to see broad alliances with Iran, and the African nations.  And (c) they have mentioned looking to China for substantial financial help going forward.

Ask yourself, how many headlines (in the past couple of years) have had anything to do with the U.S. expanding trade to secure much needed resources?  Not many.  Over a year ago I began talking about a 'Global Reset’ where the U.S. dollar loses its global reserve status, and the world re-prices virtually everything.  Everywhere I look I see the pieces coming together.  The world is tired of the constantly, devalued U.S. dollar and once the Russians, the Chinese and the Indians all come together and hammer out their desires, the U.S. dollar will be removed from its 70-year level of importance.  We’ve been the world’s safe haven for decades, and we’ve squandered it.

The fact that the ‘Global Reset’ is coming is solid.  The only question is timing.  I think it will happen sooner than most people think.  It will be like the homeowner that sees that first roach, waits until he sees a couple more, and then realizes that they’re everywhere.  Then he kicks himself for not taking action sooner.  The same thing is true with the collapse of the U.S. dollar.  Everyone's going to say: "What happened?”  It is by no small coincidence that you're not going to hear about the collapse of the dollar until the day you wake up and it is ‘Done’.  The President will come on television to announce a ‘Bank Holiday’ for several days while we make ‘currency adjustments.’  It’s not an IF anymore; it’s just a WHEN.

The Market:

The good and bad news about the markets as of late, is that any upward movements have been on the ‘lowest volume of the year.’  And although it’s nice to move upward, rather than downward – trends are dictated by volume.  Downward movements have been on very high volume, while upward movements have been on extremely light volume.  This tells me that the path of least resistance for the markets is downward.  But, that not withstanding, we did set new, all-time highs on the S&P this week.

Friday we learned that Italy (in order to boost their GDP – and to have their national debt ratio remain in line with their borrowing), has decided to include Drugs, Prostitution and Smuggling in their GDP calculations.  You read that correctly.  They are going to begin to add the value of junkies and hookers to their GDP.  That literally caused me to stop and realize that the entire world’s numbers are now just a fantasyland.  Heck, why even bother printing GDP numbers if you're going to include cocaine and black market dealings?  You may ask: Where (and How) are you getting the numbers for Drugs, Prostitution and Smuggling?  And why not just say: "All of our numbers are fake” and move on?

Speaking of absurd, I often get mail from readers telling me that I’m crazy for suggesting that the metals market is the most manipulated market on earth.  On Friday, Barclays Bank came out and admitted that it had been manipulating the price of gold for the past ten years, so that it could avoid paying out options gains to its own customers.  And what was their penalty?  It was a ‘slap on the wrist’ and a promise to never do it again.

M.W. had a great market quote this week: “The Federal Reserve has taken the place of the Venture Capitalists of the Dot.Com era and the Mortgage Lenders of the Housing Boom era.  The market is rallying because money flow is FORCED into equities as cash and bonds are made artificially unattractive.  The media and many others continue to believe the economy is doing well and is improving, because they mistakenly correlate the market rally with the economy.  Remember, the Dot.Com rally and Housing Boom, were both created on borrowed money, leveraged debt, and a blind faith that the New Economy couldn’t come down."

Factually:

-       The Russell 2000 (an index of small-cap stocks) represents approximately 10% of the total market capitalization of the United States. 
Small-caps are often viewed as a barometer for investors’ risk appetites.  When bulls are in control you’ll see these names leading the charge.  In the 8 years since 2000 that the market was positive, the small-caps have averaged annual returns of 23% (40% higher than the average return of the S&P.)

-       However, the first five months of 2014 have not been kind.  Small-caps are down 4.5%.

For the first time since November 2012 they: (a) closed below their 200-day moving average, and (b) put in a 10% decline – peak-to-trough.  This is small caps’ 36th peak-to-trough decline of at least 10% since 2000.

-       Of the first 35 peak-to-trough corrections, EVERY ONE was accompanied by large-caps falling, on average 12.8%.  Lately however, the Russell 2000 is down by 10%, while the S&P 500 is up 0.12%.

-       If the Russell can’t find some sort of bottom soon, this small cap (mom and pop) contagion could spread to the Colgate’s and Kimberly Clark’s of the world.

The way I see it:

-       Either history repeats itself, and the S&P 500 and DOW follow the lead of small caps and correct downward, OR

-       There is a summer rally taking the S&P over 2,000, and causing casual investors around the country to reach for their margin accounts in order to ‘bet the farm’ – just like in 1999.

-       To me, it feels like the elites have decided to push this market further than any sane person would guess, and we're going to break out and punch higher.  Of course it's insane, but sanity left the building years ago.

The key will be HOLDING these highs for more than just a couple of days.  We will need to hold these highs and stabilize; otherwise it will indeed be another failed breakout attempt.  So watch the S&P and see what it does next week.  The only warning I will give is this: If the S&P 1,900 doesn't hold, we could see the markets toss in the "Sell in May and go Away" towel.  The fall could be bigger than anyone expects.  So, watch the S&P Index to see that it remains above 1,900.

Tips:

Factually:

-       Congrats to those of you who were with me on the DRTX trade.  On Friday the FDA did approve their skin care treatment and the stock continued to rally.  Between the stock price and options increases, we’re going to record another 100% gainer over a one month time period.

-       The portfolio is up over 50% year to date.  (Hopefully that doesn’t jinx us going forward.) 

-       We sold FET, FPP, NLGS for small gains this past week, and purchased more MNKD and DRTX.

-       TLT continues to be a channel trade.  The latest channel shows TLT a ‘sell’ when it gets to 115+.

-       MNKD continues to rally into it’s FDA date – sometime in mid July.   The stock gained over 10% again last week – and the associated options added another 2 percent to that.

-       Our small cap energy plays continue to do well: BXE, FET, FPP, HK, PFIE, HTM, PQ, and VTNR.  And I have added 3 new stocks to our small cap play list: ASX (Advanced Semiconductor Engineering – a technology company), UIHC (United Insurance Holdings, Corp.), and SPIL (Silicon Precision Industries – a tech company).  You can’t help but fall in love with their charts, along with their most recent gains.  I’m trying to grab some of these small caps – in order to hold them for years and potentially watch them become 10-baggers within the next 18 to 24 months.

Also, I’m still a buyer of NUGT at these levels – but mostly collecting premium by:

-       Buying an equal amount of DUST / NUGT (so that the stocks offset their own rises and falls)

-       SELLing 1 to 1.5 Standard Deviation (SD) Covered Calls on both, and

-       SELLing 1 to 1.5 SD Put Credit Spreads (PCS) on both NUGT and DUST.

-       This nets you between 2 and 3% per week!

My current short-term holds are:

-       DRTX (Drug) – in @ $13.67 – (currently $16.89), w/ 10% monthly Covered Call Yield,

-       MNKD – in @ $6.35 – (currently $7.77), w/ 2% weekly Covered Call Yield,

-       TLT – in @ 112 – (currently $112.70),

-       USO (Oil) – out @ $38+ - may dive back in this week,

-       ASX (Energy) – in @ $5.81 (currently $6.28),

-       BXE (Oil) – in @ $9.11 – (currently $9.39),

-       HK (Energy) – in @ $5.25 – (currently $5.57),

-       HTM (Energy) – in @ $0.75 – (currently $0.59),

-       LSCC (Tech) – in @ $7.85 – (currently $7.91),

-       PFIE (Energy) – in @ $4.47 – (currently $3.97),

-       PQ (Energy) – in @ $5.69 – (currently $6.07),

-       PVA (Energy) – in @ $14.57 – (currently $15.54),

-       RFMD (Tech) – in @ $7.96 – (currently $9.45),

-       SPIL (Tech) – in @ 7.20 – (currently $7.61),

-       UIHC (Insurance) – in @ $16.81 – (currently $17.85),

-       VTNR (Energy) – in @ 7.02 – (currently $8.49),

-       SIL (Silver) – in at 24.51 - (currently 11.94) – no stop,

-       GLD (ETF for Gold) – in at 158.28, (currently 124.51) – no stop ($1,293.40 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 18.66) – no stop ($19.48 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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