This Week in Barrons – 6-15-2014
Everybody’s Dumping Dollars…
Since we left the gold standard in 1971, the buying power of the dollar has fallen by 80%. Unfortunately, money is supposed to STORE value, and falling by 80% somewhat defeats that purpose. Honestly, it's theft via inflation, and the world is tired of it. The world wants a more stable currency reserve that they can hold onto for at least ten years, and retain it’s buying power.
The Chinese are the most vocal about this, but the Russians, Turks, Iranians, Indians, and a host of others are more than willing to replace the U.S. dollar with another currency. This ‘replacement currency’ is going to be the single most disruptive element that has happened economically in our lifetime. Just days ago, Gazprom (the giant Russian Gas/Energy supplier) announced that 90% of its customers are willing to pay for their energy in currencies other than the U.S. dollar. The majority is going with the Euro (for now), but some (like Belarus) have already announced that they will pay in Rubles.
Now, many people will dismiss this by saying: “Who cares, that’s Russia." But on Friday, France (yes France) suggested that it’s time to dump the dollar. So now along with China, and Russia comes Christian Noyer (Governor of the Bank of France and member of the European Central Bank’s Governing Council) saying: “Our companies would have maximum interest in doing the most possible transactions in other currencies. Trade between China and Europe -- do it in Euros, do it in Renminbi, stop doing it in U.S. dollars. This is an affair that will leave marks."
I suspect that we’re just months away from Saudi Arabia announcing to the world that they will sell oil in currencies other than the dollar. At that moment, all of the other OPEC nations will follow suit. Let’s not forget, Iraq is the 2nd largest oil producer for OPEC, and if the militants take over – it’s doubtful that they will continue using U.S. dollars.
I'm on record saying that all eyes are turning East, and the U.S. isn't invited. Yes, countries will be glad to sell goods to the U.S. – after all – the U.S. consumer is the world’s ultimate shopper. The U.S. is the only country where you find:
- The average consumer having 26 credit cards,
- The average college student having over $50,000 in debt,
- The average retiree having less than $40,000 in savings, and
- An economy that for the next 16 years, between 8,000 and 10,000 baby boomers will retire each DAY.
In other words, the U.S.'s ability to ‘shop till you drop’ has seen better days. The rest of the world has done the math and they ‘get it’. They have decided that if they’re going to make a global move, NOW is the time to do it. My only worry is that some of this happens by force instead of by pact. For example:
- If the world ditches the U.S. dollar, are we ‘evil’ enough to start a nuclear confrontation to stop that adoption?
- If China decides it needs even more resources to keep their population in food and goods, will they simply ‘take it’ from weaker nations?
- Right now, I see the back door deals, the pacts, and the trading zones being developed, but if/when things start getting ugly – all bets are off.
The U.S. has slapped sanctions on Russia, and we expect the countries in the ECU to follow our lead. Honestly, Germany has approximately 4,000 businesses that deal with Russia. Is Germany really going to go along with tougher sanctions that would ultimately hurt their own corporations? The Germans might like us, but biting the hand that ‘feeds’ them is NOT the German way.
Wednesday we'll be hearing from the Federal Reserve concerning their monetary policy. Will they taper again? Will they slow or even increase the taper? The answer to those questions will determine if we get a substantial pull back, or if we resume our climb to all-time highs.
After a decent start to the week, the market went into pause mode trying to digest its gains. But then the rumor mill started. One rumor was that in Iraq, a huge group of militants had over run large portions of the country. Another rumor was that the FED would INCREASE the speed of the taper, to $15 Billion instead of their normal $10 Billion/mo. Then there were the frightened banksters trying to find out if they were the victims of commodity fraud in the Chinese ports. That was all that was needed for the market to do some weekly profit taking.
Friday was off to a tough start as the Bank of England suggested they might raise interest rates sooner than anticipated. That bothered Europe, which in turn spilled over onto our futures. The President had to come on television to explain what he may do about the Iraq situation. Russia sent tanks to its borders, tired of the Ukraine violence spilling into their own country. Oil was spiking higher, and gasoline was indicated to gain 11 cents or more. GM recalled another 500,000 cars, and our consumer confidence number fell the most in 18 months. Yet on Friday, somehow, we managed a bravado bounce, with the DOW ending UP 41 points.
This week Larry Summers, the former Secretary of the Treasury, continued to advance the bull case for the stock market rally. His thesis is that the economy has structurally changed. The change is that capital and labor are no longer complementary. In the past, to produce goods you needed people, and people needed machines to produce goods. However, Larry contends that starting in the late 90's, capital began to be not a ‘complement’ but a ‘substitute’ for labor. Essentially, the automobile factory no longer needed the same ratio of people to machines – effectively replacing the people making the cars with technology. This increased demand for technology is actually lowering the demand for labor. This also explains the growing income inequality in the world. People are being replaced by technology, and the capitalists are taking greater and greater gains from economic growth. Therefore the jobs that are in highest demand are: (a) very ‘personal’ jobs like barbers, plumbers, and carpenters that are not easily replaced by technology, and (b) very high-wage positions that require extensive analytical abilities that are also hard to replace with machines. This disruption has proven to be extremely positive for publicly traded corporations as it produces higher profit margins as a result of low wage growth.
If the shift from capital being a ‘complement’ to a ‘replacement’ for labor is truly here, the effect will be three-fold:
- First, interest rates will remain much lower for a longer period of time than anyone is currently anticipating.
- Second, the stock market will go much higher than what people are anticipating. If technology is allowing capital investment to get greater returns, then the best course of action is to ‘own the capital’ (aka: invest in the stock market).
- Finally, combining the economic shift with the increasing global labor supply – we are looking at a prolonged period of stagnant wage growth.
This week is the FED two-day policy meeting. What they have to say will preview the course of the market for the next month or so.
- If they were to say that they're willing to stop tapering – we’ll soar to new highs.
- If they announce another $10B cut, and say they're keeping that policy – we’ll probably trade sideways and down.
- If they intimate that they're willing to increase the amount of the taper – we’ll see a fast and ugly 20% drop.
Therefore, Monday and Tuesday should be choppy, and we won’t truly know the true direction until Wednesday afternoon. Be careful, first reactions to the FED minutes are (more often than not) wrong.
Over these next several weeks, I’m going to begin to modify the TIPS section – into a more focused trading section. I’ll be recommending exact trades to make, and how to make them. The timing will be a little ‘interesting’ but I’ll attempt to announce my trades via Twitter and via StockTwits. If you wish to ‘follow me’, my nickname on both of these sites is: ‘taylorpamm’.
This coming Friday is Quadruple Witching, and for the week I’m looking for the following plays:
- BIDU – is in a ‘Weekly Squeeze’. Look at the July, monthly call options: $165 strike price @ $15.10
- FireEye (FEYE) – Review the September, monthly call options: $30 strike price @ $8.40, and the $38 strike price @ $4.20
- Western Digital (WDC) – Review the July, monthly call options: $85 strike price @ $7.60.
- XLNX – is in a ‘Daily Squeeze’. Review the July, monthly call options: $45 strike price @ $2.37.
- Solar Power (SPWR) – is in a ‘Weekly Squeeze’. Review the July, monthly call options: $33 strike price @ $3.55, and the $36 strike price @ $1.75.
- UPL – Evaluate the July, monthly call options: $27 strike price @ $2.40, and the $30 strike price @ $0.85.
- J.P. Morgan (JPM) – there is an interesting ‘pinning’ arrangement taking shape. That is to say based upon the Call and Put volume, the stock could be setting up to end the week around $57.50. Therefore I would recommend: SELLing the $57.50 – June monthly CALL options, and SELLing the $57.50 – June monthly PUT Options. If the stock PINS at $57.50 – then you collect both premiums. I would also recommend a purchase of the July monthly call options: $55 strike price @ $2.36 – on the hopes that we will see pent-up demand purchase JPM – after quadruple witching Friday.
Reviewing our Past Week’s Performance:
- The Apple (AAPL) 7 for 1 stock split worked out nicely for us – with the stock peaking last week around $94+ per share. The goal was to take most of our position ‘off the table’ when it reached that 1.272 extension – and that’s what we did. We remain holding a small amount – to see if we can potentially retest the all-time highs before quadruple witching Friday (June 20th). So let’s keep our fingers crossed there.
- Mannkind Pharmaceutical (MNKD) – Again, congrats to those of you who are still with me in MNKD. This week we saw the stock pull back into the $9’s and then ramp right back up to close in the mid-$10’s. I’m continuing to (a) buy the pullbacks, and (b) sell the weekly $11 / $11.50 or even $12 Covered Calls for extra income. And if you get ‘called out’, you will pocket a nice weekly return in excess of 9%.
- I’m still in Durata Therapeutics (DRTX) – using the same MNKD strategy.
- My small energy portfolio continues below: yielding an average monthly return of slightly over 16% for the month.
My current short-term holds are:
- DRTX (Drug) – in @ $13.67 – (currently $15.70), 15% increase
o (Look at Selling the $15 / $12.50 Put Credit Spread)
- MNKD – in @ $6.35 – (currently $10.52), 65% increase
- AMKR (Energy) – In @ $9.43 (currently $11.70) 24% increase / mo.
- ASX (Tech) – in @ $5.81 (currently $6.36), 9% increase / mo.
- FET (Energy) – in @ $30.53 (currently $34.08), 12% increase / mo.
- FPP (Energy) – in @ $5.68 (currently $5.71), 1% increase / wk.
- HK (Energy) – in @ $5.25 – (currently $6.64), 26% increase / mo.
- KOG (Energy) – in @ $12.98 – (currently $13.79), 6% increase / wk.
- NGLS (Energy) – in @ $64.47 – (currently $68.62), 6% increase / mo.
- NOG (Energy) – in @ $14.97 – (currently $16.41), 10% increase / 2 wk.
- PFIE (Energy) – in @ $3.97 – (currently $5.30), 34% decrease / mo.
- PQ (Energy) – in @ $5.87 – (currently $6.69), 17% increase / mo.
- PVA (Energy) – in @ $14.57 – (currently $15.46), 6% increase / mo.
- RFMD (Tech) – in @ $7.96 – (currently $9.90), 24% increase / mo.
- SPIL (Tech) – in @ 7.20 – (currently $8.08), 12% increase / mo.
- THRM (Trans) – in @ $41.42 – (currently $42.18), 2% increase / 2 wk.
- UIHC (Insurance) – in @ $16.81 – (currently $18.02), 7% increase / 2 wk.
- VTNR (Energy) – in @ 7.35 – (currently $9.45), 29% increase / mo.
- SIL (Silver) – in at 24.51 - (currently 12.75) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 122.93) – no stop ($1,278 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.90) – no stop ($19.73 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.