This Week in Barrons – 6-8-2014
Crazy Eddie: “Our Prices Are Insane!”
All through college one of my best friends from New Jersey always talked about Crazy Eddie’s television commercials where he would scream about his prices being – ‘Insane’. Speaking of ‘insanity’, remember the street card game called: ‘3-Card Monte’? It’s a card game of deflection, where a dealer will have 3 cards displayed – often two black kings and a red ace. The dealer will then proceed to turn them face down, mix them up a little, and then ask you to find the ace. In the beginning, it’s easy, and you find the ace each time – because he’s just ‘baiting the hook’ (letting you win). The moment he senses you ‘take the bait’, he starts throwing the cards in a different manner, confusing you, and causing you to lose all your money.
This week’s global economic moves remind me of a ‘3-Card Monte’. The various global dealers shuffle their numbers around, hide the ugly facts, and allow you to easily see the ‘bright red ace’. For example: we all know that inflation is in high gear, but according to the various global FED’s, not only does it not exist, they would like MORE of it. The reality is: last week Haver Analytics produced a chart listing many elements, and their respective ‘year over year’ price increases – such as:
- Railway Transportation = up +17%,
- Movie Tickets = up +16%,
- Games, Toys, and hobbies = up +14%,
- Pleasure Boats and Aircraft = up +8.5%,
- Pharmaceuticals = up +8.5%,
- Video and Audio Equipment = up +8%,
- New Cars = up +6%,
- Motorcycles = up +6.3%,
- Household Appliances = up +6%,
- Air Transportation = up +5% (not counting baggage fees, etc.),
- Hotels = up +4.5%, and
- Cable and Satellite TV = up 4%.
Therefore, factually - Inflation is really here, and the worry about ‘deflation’ is a just a deflection – one big ‘3-Card Monte’.
But what about the ‘3-Card Monte’ that’s surfacing surrounding commodities? On Monday, Reuters reported: “China's northeastern port of Qingdao has halted shipments of aluminum and copper due to an investigation by authorities, causing concern among bankers and trade houses financing the metals.” The scam goes as follows:
- China has been using a lot of commodities as collateral to make business loans.
- For example: a businessman tells his banker that he would like to borrow $3M, and would like to use his 5,000 tons of copper that he has in XYZ warehouse as collateral.
- The banker sends someone out to view and verify the copper in XYZ warehouse.
- The banker gets a report back verifying the copper being in XYZ warehouse, and the banker (correspondingly) releases the $3M to the businessman.
- The issue is that the businessman used that very same copper as collateral at 3 other banks in town – where he also received millions of dollars in loans.
- It seems that right after banker #1 secured the loan, the copper was moved to another warehouse and a loan was secured there, and then moved to a 3rd , 4th , and 5th warehouse.
- So the entire port has shut down operations as they try and figure out just how many banks have loans outstanding against the SAME shipments of copper/Iron/aluminum etc.
- The other problem is figuring out WHERE the particular commodities are actually located.
- The other problem is figuring out WHERE the particular commodities are actually located.
To quote another banker familiar with the situation: “It appears there is a discrepancy in the amount of actual metal that should be there, and metal that is actually there. We think the discrepancies are approximately 80,000 tons of aluminum, and 20,000 tons of copper – but the volumes could be substantially higher – and the collateralization is at least triple." That means that for every shipment of ‘stuff’, there are 3 (or more) banks now laying claim to it because they have made loans against it. This is called: re-hypothecation. For Gold, it is believed that for every ounce of Gold – over 100 different banks have laid claim to (loaned money against) that particular ounce of Gold.
So who owns the stuff? Great question. But, this scam isn’t new. While the name – re-hypothecation is new – the bogus inventory / securing loans scam is as old as the hills. Back in the 70's, there was ‘Crazy Eddie’ electronics. Crazy Eddie sold stereos, radios, and speakers at ‘insanely’ low prices. Eddie would load up a store with the inventory from all the other stores, and (the next day) have the bank verify that store’s inventory. As soon as the banker had left the store, Eddie would take it all over to the next store that the bankers were inspecting. The bankers would be satisfied, and continue to write inventory ‘collateralized’ loans. Eddie would pocket half the money, and use the other half for inventory in yet another new store. But how is this any different than our own Central Bankers printing money out of thin air? At least ‘Crazy Eddie’ went to jail - meanwhile our present-day ‘Banksters’ remain at large.
Last week, virtually every day was an all-new high. On Thursday we learned that Draghi and the European Central Bank (ECB) were going to take interest rates NEGATIVE in an effort to force banks to lend. The market loved it, not because it will work – but because Draghi said that he was ‘Not Finished” with his reforms. This means that going forward he could still come out with some form of QE. So (on Thursday) the market ended with new, all-time highs on the DOW and the S&P.
Friday brought up the Non-Farm Payrolls Report. According to the report there were 217,000 jobs created in May. Factually:
- Of those 217,000 jobs – 205,000 were fictitious, Birth/Death model accounting. Subtracting off the fictitious 205,000 jobs, this leaves us with 12,000 ‘real jobs’ created in the month of May. This 12,000 (real figure) would offer Democrats up for re-election little ammo to fight: Benghazi, the VA disaster, and the terrorist release – hence the inflated Birth/Death figure.
- The other disturbing element is that most of the jobs created were in the (minimum wage) retail and leisure industries, and not in the high paying ‘technology and medical’ arenas.
The Street didn’t care, and once again the DOW and S&P made new, all-time highs on Friday. With the European decision and the jobs report behind us, there’s a mild chance that we see a little profit-taking sneak in over the next week or so. I tend to think the market will fade off a bit and try and digest the latest big push higher. The question now is how Ms. Yellen and the FED will respond at her June 17th meeting. Japan and Europe have both taken radical actions to spur inflation, devalue their currency, force investments into equities, and boost exports. The moves by Japan hurt the US, and it’s only a matter of time before the ECB’s recent moves impact our markets. Combine the negative GDP, the ECB’s recent stimulus action, and our lackluster Labor Report – this could help Yellen either halt or hint at a halt in the QE taper.
In the U.S. the path has been one called ZIRP (zero interest rates for overnight lending facilities). The Europeans have decided that zero rates are just too ‘common place’ for their taste, and have announced that deposit rates will be negative 0.1%. Yes – depositors will have to PAY for the privilege of keeping money in a bank. The idea behind this particular absurdity is that it will force banks to lend money for projects – since lending it out will create a bigger return than just sitting on it and paying for the privilege. But there is absolutely NO proof that this actually works. Denmark tried it for a year, and it simply kept the Danish currency depressed enough that they could export more goods. So that ended up being simply a currency war. This policy truly CRUSHES the SAVER, as it forces them into riskier assets in order not to LOSE money.
For the longest time economists thought (and many still do) that negative interest rates equated to serious economic problems that would mark the end of a particular ‘currency’ being a store of value. Negative interest rates are the ultimate economic weapon – as they are: a tax on money, a punishment for savers, a method of forcing people to spend money even if they don’t want to, and a method of forcing people to borrow money and increase debt. In an economic nuclear war, Draghi just pushed the button. On one hand politicians, political pundits, and Keynesian economists are telling us about a strong and robust recovery, as some are expecting 3 – 4% growth for 2014. However, if our economy is as strong as they say – why the radical monetary policy? Honestly, everyone can choose to temporarily ignore the math associated with negative interest rates, but in the end, no one will be able to avoid its results.
- Apple (AAPL) is doing a 7:1 stock split over this weekend. The debate that’s raging is whether Monday (now that Apple will be trading around $92+/share) brings an immediate acceleration to $100/share, OR whether it will need to do a little more ‘back-filling’ before continuing it’s rise in price. I believe the stock is heading back to all-time highs, but I’m on the fence as to whether it will occur this coming week. If you’re in the stock/options already – CONGRATS – and on Monday you should have 7X more stock/options than you had on Friday. You may have to endure a couple days of pain before the uptrend continues – otherwise look for an exit near $100 per share. If you’re not currently in the stock/option – let’s discuss some plays in AAPL in next Sunday’s letter.
- Mannkind Pharmaceutical (MNKD) – Congrats to those of you who are still with me in MNKD. This week we saw the stock go from $8.90 to $11, before ending the week @ $10.28. We remain before the scheduled, mid-July FDA approval date. In MNKD – I’m continuing to: (a) Buy the stock @ market $10.28, (b) sell the weekly $11 Covered Call @ $0.29 weekly – and (c) if you get called out you will pocket a 9% weekly premium. If you don’t get called out – you have the 2.5% premium given by the Covered Call itself. The other way I play MNKD is by selling the $10 / $9 Put Credit Spread for $0.30 – and either pocketing the $300 (for 10 options) for the week – or being PUT the stock for a net purchase price of $9.70 per share.
- Durata Therapeutics (DRTX) – With DRTX I’m continuing to see it retrace to its previous highs. I’m selling the $15/$12.50 Put Credit Spread for $0.45 cents, (anything above 25 cents I consider a gift – fyi) – along with employing the same philosophy as MNKD above. Here again, the $17.50 Covered Calls are paying over 2% and that’s not too bad for a 2-week hold of the stock.
- My small energy and tech plays continue below: AMKR, ASX, FET, FPP, HK, LSCC, NGLS, PFIE, PQ, PVA, RFMD, SPIL, THRM, UIHC and VTNR. I continue to purchase these stocks while they are very ‘affordable’. The portfolio was up (all totaled) over 8% in the month of May, so we are ‘off to the races.’
- I’m adding AME, AGCO, GRFS, KOG, and NWE to my stocks to ‘watch’ list for next week.
My current short-term holds are:
- DRTX (Drug) – in @ $13.67 – (currently $16.03), 18% increase
o (Look at $15 / $12.50 Put Credit Spread)
- MNKD – in @ $6.35 – (currently $10.28), 62% increase
- TLT – Waiting to enter again,
- USO (Oil) – Waiting to enter again,
- AMKR (Energy) – In @ $9.43 (currently $10.75) 14% increase
- ASX (Tech) – in @ $5.81 (currently $6.35), 19% increase
- FET (Energy) – in @ $30.53 (currently $34.32), 12% increase
- HK (Energy) – in @ $5.25 – (currently $6.40), 22% increase
- LSCC (Tech) – in @ $7.85 – (currently $8.21), 5% increase
- NGLS (Energy) – in @ $64.47 – (currently $68.34), 6% increase
- PFIE (Energy) – in @ $3.97 – (currently $4.15), 5% decrease
- PQ (Energy) – in @ $5.87 – (currently $6.08), 4% increase
- PVA (Energy) – in @ $14.57 – (currently $14.26), -2% increase
- RFMD (Tech) – in @ $7.96 – (currently $9.60), 21% increase
- SPIL (Tech) – in @ 7.20 – (currently $8.44), 17% increase
- THRM (Trans) – in @ $41.42 – (currently $43.36), 5% increase
- UIHC (Insurance) – in @ $16.81 – (currently $18.25), 9% increase
- VTNR (Energy) – in @ 7.35 – (currently $9.50), 29% increase
- SIL (Silver) – in at 24.51 - (currently 11.76) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 120.61) – no stop ($1,253 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 18.28) – no stop ($19.05 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting: <> .
Please write to Mr. Culbertson at: <firstname.lastname@example.org> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <>.
If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is the handle.
If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Remember the Blog: <http://>
Until next week – be safe.