This Week in Barrons – 5-4-2014
Once again - Let’s pretty-up that Pig
On Friday we received the most recent Non-Farm Payroll Report, and they certainly put an extra coat of lipstick on that pig. Let’s talk about that, the Ukraine, and the world’s push to distance itself from the U.S.
A week or so ago, I mentioned that we would start to see much better economic news hitting the wires. It’s NOT because the economy is warming up, because it’s NOT. It’s NOT because the Fed's QE programs are finally working, because they’re NOT. It is because our Government’s PR machine has kicked into full gear. Democrats (that have stood by the President for years) are divorcing him in droves for fear of losing their mid-term elections. Because most people have been trained to think that a rising stock market equates to a good economy, the directive from the top has been to keep this ‘pig’ lookin’ good at all times. Make the stock market the poster child for the Democrats.
Friday we received the Non-Farm Payroll (Jobs) Report. The report showed that the U.S. had gained 288K jobs. Unfortunately the ‘Birth/Death’ portion of the report created 235,000 of those jobs. Leaving only 53,000 jobs as being ‘real’ jobs created during the previous month. Allow me to briefly explain the ‘Birth/Death’ model. Decades ago an algorithm was created that said for every ‘X’ number of people fired / laid-off from a job – some percentage of those people will go out, open a business and hire – below the radar. There is no proof that these jobs exist, no tax receipts, no 1099’s, no anything. It's simply an estimate based upon historical performance. The issue with ‘historical performance’ is that it ‘does not guarantee future results.’ Factually – the U.S. created the fewest small businesses in its history in 2013, and is on an even worse course for 2014. I’m thinking that the birth/deal algorithms need a bit of tweaking. I have trouble believing that 235,000 jobs were created by: unemployed people with too much debt, no savings, and no ability to put together $2,000 in case of an emergency.
However, the ‘real numbers’ showed a much more earth-shattering conclusion. The U.S. labor participation rate fell to its lowest level in RECORDED HISTORY. The ‘Jobs’ Report highlighted a big drop in the unemployment rate from 6.7% to just 6.3%. But, the unemployment rate calculation currently ignores everyone who has ‘given up’ looking for work. Our government (when trying to get the unemployment rate to show a smaller number) modified the calculation and determined that if someone ‘gave up’ looking for a job, they are no longer unemployed. Last month – 806,000 people simply ‘gave up’ looking for work – were dropped from the ranks of the unemployed – and the unemployment fell from 6.7% to 6.3% for all the wrong reasons. But it gets better. When reviewing the data, the only people getting hired are ‘old people’. The 25 - 55 year old segment actually LOST about 200K jobs. You can expect more Government PR as we move closer to the elections, unless we are in a true war with Russia.
I believe that a global currency ‘reset’ is coming. This notion took a giant step forward last week as the Chinese have aligned themselves with multiple nations to do business in the Yuan (their currency) and bypass the U.S. dollar. The reason that the US dollar is the Global reserve currency is because everyone needed oil, and oil (previous to this year) could only be purchased with U.S. dollars. This ‘Petro-Dollar’ was set up decades ago by an agreement between the U.S. and the Saudi’s. This assured the U.S. that every nation had to keep a stockpile of U.S. dollars so they could import oil.
China does not want U.S. dollars, but rather wants their own currency (ultimately backed by Gold) to be an important global player. They have created alliances around the world to do trade in native currencies instead of the dollar. We are days away from "full convertibility" – where the Yuan will be exchangeable for any currency. The Chinese see a day where their Yuan (backed by gold), will be seen as the most stable global currency, and the U.S. politicians will no longer be able to ‘print’ all the dollars they want.
This timetable has been accelerated by the U.S.’s botched coup of the Ukraine, which pushed Russia and China ever closer. Russia doesn’t trust the U.S. politicians and has been turning its attention toward energy trades – actively making ‘oil for goods’ deals with Iran, Brazil, Turkey, North Korea, etc.
Bottom line, the nations of the world that produce hard-assets like oil, coal, copper, etc. are tired of having to deal with a depreciating currency such as the U.S. dollar. They're tired of exchange rates that fluctuate daily because the global currency isn't fixed to something solid like Gold. They're smart. They want to ‘peg’ a currency to Gold and set a price that their currency will ALWAYS be worth.
I think that in May 2014, Russia will announce a sweeping deal with China concerning supplying them with enormous amounts of natural gas and even oil. I also think that we will hear that China has set up stronger alliances, with the oil-producing nations – and will begin to abandon the U.S. dollar completely.
I think that the U.S. didn’t initiate the Ukraine coup just to place NATO forces closer to Russian border, but rather as a measure of standing closer to Europe, the Euro and solidifying the U.S. dollar. We realize that the U.S. dollar standard is on the ropes. Remember to continue to exchange dollars for real assets – such as gold, silver and real estate – every chance you get. Many elements will play out over the next two years, and some of it could be dramatic. Please, be safe out there.
The stock market ran right back up to its all-time highs, and then the air came out – again. On Friday, they tried rallying the market based upon the jobs report, but even the banksters couldn’t justify using it as an excuse to push stocks higher. On top of that, nobody wanted to get brave in front of yet another Ukraine weekend. But if nothing happens over the weekend in the Ukraine, will the beginning of the week be green?
Last week, the market was set up technically to roll over and correct, and our FED simply stepped in and jammed us higher. We've seen that happen over 18 times in the last three years. Well – here we are again. We hit the all-time highs, didn't break through and hold, but rather faded off a bit. If you used logic, you'd say that the market should go down. However, this market doesn’t run on logic or fundamentals, but rather FED money. So saying that some kind of ‘top’ is in has been an exercise in frustration.
I think the only way you can navigate this mess is to simply keep buying good set ups, until the market finally does break. Currently, I’m watch 4 general areas:
- The Bond Market, which can be viewed via TLT – an ETF (Exchange Traded Fund) for the Bond market.
- The Stock Market Indices, which break out into:
o The IWM – the Russell Index for Small Cap Companies,
o The QQQ – the NASDAQ Index,
o The DIA – the Dow Jones Industrial Large Cap Index, and
o The SPY – the S&P 500 Index.
- The Currency Market, normally viewed via U.S. Dollar, U.K. Pound, Chinese Yuan, German DM, etc.
- AND the correlated assets such as Gold, Oil, and Silver.
I watch the money flow between these 4 main areas, and recently – the money has been flowing into Bonds (TLT) – making any ‘pullback’ in the TLT a buyable event. Often there is a direct correlation between a country’s bond market and their currency. For example: as the U.K. Bonds are going higher – so is the British Pound Sterling. As the German Bonds are going higher – so is the German Deutsch Mark. Unfortunately in the U.S. this correlation is NOT holding. As U.S. Bonds are going higher, the US dollar is trending lower, and this is indeed disturbing (as both are ‘flight to quality’ vehicles). Couple this with the fact that the Dollar index is in a ‘technical-squeeze’. The last ‘technical-squeeze’ for the U.S. dollar occurred 12 years ago resulting in a huge decline in the dollar and the resulting rise in Gold. We could be set-up ‘technically’ for a very volatile (and similar) time period.
Next week – with some new cash coming into a market – we could see the QQQ and IWM rally for a couple days – giving us the opportunity to sell ‘call credit spreads’ on many of our favorite stocks of the past. However remember the adage: “Sell in May, and go away.” Later in the week and throughout the month – we could replicate the pattern of small rises in the beginning of the week – coupled with declines near the end. These are perfect opportunities for buying and holding TLT (believing bonds are going higher), and for selling Call Credit Spreads – believing specific stocks (at least for the short term) are moving lower.
Congrats to those of you who grabbed the TLT trade with me. A double within a week is nothing to sneeze at. For this week: again watch TLT ($112.88) as it potentially has a date to retest its $130 highs. TLT is a ‘bond market’ ETF (Exchange Traded Fund) that when the market goes ‘Up’ – trades sideways, and when the market goes ‘Down’ – trades nicely higher. Options in TLT virtually doubled last week – so I took some ‘off the table’ on Friday afternoon. I will certainly ‘load up’ again in TLT on any move lower. By ‘load up’ I mean purchase equal amounts of Delta 70 and Delta 20 Calls between 60 and 100 days out.
- In this case I would be buying the July, $100 Calls for approximately $3.50 / and a corresponding dollar amount of the July, $117 Calls for approximately $0.60.
- You could also purchase the June 110’s and 117’s if you wish a slightly shorter time horizon.
Mannkind Pharmaceuticals MNKD ($6.35) has earnings this week – so expect it to be volatile – and the $6.50 options are offering a nice premium of 3%. This week, I’m also going to play Tesla (TSLA) and many of the old ‘high-flyers’ (BIDU, CELG, GOOG, CMG, LNKD, TWTR and QIHU) by selling 1 to 1.5 SD (standard deviation) – out of the money, weekly ‘Call Credit Spreads’. For example: Tesla (TSLA) is currently selling for approx. $211 / share.
- If TSLA rallies $14 on Monday and Tuesday and sits @ $225 on Wednesday.
- The TSLA ‘standard deviation’ (expected move) is $25.
- Sell the May 9th, weekly, ($225 + $25) $250 Call Option – and pocket $1.50 per share,
- Buy the May 9th, weekly, $255 Call Option (for protection – in case Tesla went higher on great news) – paying $1.11
- You would net the difference of $0.40 per share for the week.
- The probability of this trade working as outlined above is 92% - very high indeed.
A shout out to AAM (a very observant reader), who noticed that a more efficient use of capital on DUST and NUGT would be to sell the 1.5 standard deviation, out of the money, Put Credit Spreads on each of them. It worked well last week – THANKS.
I think the long-strength in this market resides in Apple (AAPL) which is acting more like a Bond than a Stock, and in the energy stocks such as Exxon Mobile (XOM) and Schlumberger (SLB). I also like our smaller energy plays: BXE ($10), FPP ($5.40), HK ($5.51), PFIE ($4.06), HTM ($0.77), PQ ($5.88), VTNR ($8.10) and FET ($30.53).
My current short-term holds are:
- MNKD – in @ $6.35 – (currently $6.35 – w/ 3+% per week yield on the $6.50 covered call option),
- TLT – in @ $106.22 – (currently $112.88), - Sold much of our position on Friday – will dive in early week on any pull-back
- USO (Oil) – in @ $37.19 - (currently $36.30),
- BXE (Oil) – in @ $9.11 – (currently $10.00),
- FPP (Oil) – in @ $5.32 – (currently $5.40),
- HK (Energy) – in @ $5.25 – (currently $5.51),
- LSCC (Tech) – in @ $7.85 – (currently $8.18),
- LSG (Gold) – in @ $0.78 – (currently $0.82),
- NGLS (Nat Gas) – in @ 60.11 – (currently $60.00),
- PFIE (Energy) – in @ $4.47 – (currently $4.06),
- POZN (Pharma.) – in @ $8.68 – (currently $8.20),
- PTIE (Pain Tmt.) – in @ $5.34 – (currently $5.49),
- RFMD (Tech) – in @ $7.96 – (currently $8.65),
- SIL (Silver) – in at 24.51 - (currently 12.54) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 125.06) – no stop ($1,300 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.69) – no stop ($19.52 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.