RF's Financial News

RF's Financial News

Sunday, July 20, 2014

This Week in Barrons - 7-20-2014

This Week in Barrons – 7-20-2014


The False Flag

The term ‘false flag’ is hundreds of years old and first came about during the naval battles between Spain, England and France.  In those days, they lacked radar and other sophisticated communications systems to help identify ships.  If you were sailing in a convoy, you would normally have a lookout with a spyglass sitting in the ‘crows nest’ (typically a cloth basket suspended from the highest mast) looking for other ships and their flags – telling you to what nation they belonged.

It was back then, that a clever officer of an attacking flotilla found that by taking down his own country's ‘colors’ (flag), and purposefully flying the flag of the opposing nation – would give him the added element of surprise.  That way the lookout would be fooled into thinking that the approaching ships were friendly; thereby allowing them to get considerably closer than if they would have been truthfully identified.  It wasn’t until the attackers started firing, that the defenders realized the ship was flying a ‘false flag’ – and would hurry to fire back.

Today, the most common use of the phrase ‘false flag’ describes someone doing an evil deed, and making the evil appear as if it was perpetrated by the enemy – in order to justify taking action (against the enemy).

In the past three weeks I have marveled at the speed at which the world is banding together to bypass the U.S. dollar.  The BRIC’s (Brazil, Russia, India & China) Bank is now in completion, and will NOT use dollars as its medium of exchange.  When the world has no choice but to use your currency for trade, (and the various clearing houses and derivatives are all set up to facilitate trading in that currency) you become more powerful because the system is set up cater to your wishes.  This is why U.S. sanctions are often so damaging to other countries. 
-       IF you are forced to use U.S. dollars, and
-       IF those U.S. dollars must clear through U.S. dollar based systems that connect to thousands of banks and institutions around the globe, and
-       IF you are shut off from that ability to exchange dollars, then
-       YOU are in trouble – especially when trying to import food and obtain oil.

Therefore, holding global reserve currency status is an incredibly powerful weapon, and has the power to bring most countries ‘in line’.  But: "Times, they are a Changin’”, and from where I sit – much of last week points to U.S. desperation.  The U.S. cannot afford to lose its global reserve currency status, and everyone knows it.  But U.S. banks are in much worse trouble.  The idea of a completely separate banking system (BRIC’s Bank) not being run by the IMF, or the World Bank or the Federal Reserve System – scares them into retaliation mode.  They tried lashing out against the French bank PNB with a $9 Billion fine for trading with nations we told them were forbidden.  And we tried further sanctions against Russia.  Both decisions failed to play out on the world stage as we had hoped.

In fact, rather than U.S. sanctions causing Putin to ‘come in line,’ he is forming increasingly stronger alliances with his BRIC nations.  In the past two weeks Putin has visited and signed reciprocal agreements with Cuba, Argentina and Brazil.  In Cuba he is turning old military bases and ports into a modern, maritime trading hub.  So instead of bowing to the U.S., Putin is expanding the Eurasian trade zone right here in our own backyard.  Recently Germany denounced U.S. sanctions – mostly because so many German companies are currently doing business with Russia.  Combining Germany’s technology and precise manufacturing with Russia’s massive resources forms a Russian-German alliance that makes major, economic sense.

Why do we continue to poke Russia in the eye with a stick?  For the past 25 years, Russia has (a) been a good neighbor to Europe, (b) supplied the Ukraine natural gas at a discount (allowing them to siphon off even more illegally), and (c) fought off terrorists.  Why did the U.S. decide to push NATO operations right into Russia’s backyard in Crimea and Ukraine?  Why - because our banksters see the BRIC's abandoning U.S. policies and our currency.  We gambled.  We were wrong in thinking that our European NATO allies would force Russia to abandon their plans to merge with China and others.

To put this into perspective:
-       The BRIC’s contain almost 3 Billion people (10X more than the U.S.), doing over $15 Trillion in GDP (18% of all global trade) and growing.  Russia is the single largest country, China the most populated, and Brazil one of the most resource rich countries on Earth.  And, if these countries declare a military alliance – they dwarf our military.
-       The U.S. is $17 Trillion dollars in debt, with a stagnant to declining economy.  Our unfunded liabilities (medical and social security) top $100 Trillion.  And according to the latest polls, only 10% of our population trusts our Government.

I’m hearing that the only way out is to enter a ‘hot war’ with Russia.  That would solve two massive problems: (a) Allow for a shut down of the entire BRIC Banking / Eurasian trade zone, and (b) give the FED someone to blame for our economic demise.  But, try as we might, we haven’t been able to suck Putin into a military confrontation.

As soon as the Malaysian airliner was shot down I thought: “False Flag”.  As expected everyone was blaming everyone else.  The Ukrainian Government and the U.S. were condemning Russia, while Russia was turning blame back the other way.  Why would the Russians shoot down a civilian aircraft?  They know that the entire world would hate them for it, and would turn ‘the court of public opinion’ toward the Ukraine and the U.S.  It would make perfect sense for the Ukrainians to do it, and BLAME the Russian rebels – putting more pressure on the Russians to be seen as evildoers that need to be stopped.

Currently – there are many theories and fingers being pointed:
-       Some say it was the Ukrainians because Putin's own jet was flying that same trajectory, and maybe they thought they could kill him.
-       Some say it was the separatists mistaking a commercial airliner for a Ukrainian military supply plane.
-       There's even evidence that the pilot veered off his standard route to purposefully fly directly over a hotspot.
-       The good news is that Russia has continued to remain co-operative and completely engaged in global dialogue.

I think this recent statement by Putin (to the news agency Itar-Tass) truly sums up what is really going on in the world:  “We are implementing a system of measures that prevent the harassment of countries that do not agree with some foreign policy decisions made by the United States and their allies."

Stay tuned and watch for ‘False Flags’.

The Market...

These are the times that try men's souls.  On Wednesday the market pushed itself to this year’s 17th all-time high.  But Thursday saw the market drop 165 points on the news of Israel’s invasion of Gaza, and the downing of the Malaysian airliner in the Ukraine.  On Friday, one of two things happened – either (a) every investor decided that a blown up civilian airliner in a military hotspot, and a ground invasion of thousands of homes in Gaza meant nothing; therefore, they decided to buy the dip, OR (b) the same hand that has pushed this market higher in the face of every economic ill you can imagine – made it happen once again.  I’m personally learning towards ‘Door Number 2’.

Virtually every single indicator concerning the health of our markets is flashing danger.  Reports tell us that the chance of an ‘outlier event’ preceding a market fall are extremely high.  Numbers prove that corporate buybacks and FED policy have been by far the major influencing factors for this market going higher.  ‘Unidentified futures buying’ by someone with ‘deep pockets’ consistently comes out of the blue to ‘buy the dip’ and rescue the markets.  Banks have virtually created earnings out of thin air by being allowed to mark their assets to ‘model’ rather than to ‘market’.  I wonder, what would cause the market to stop moving higher?  We know that it isn’t: lousy economic reports, bad housing numbers, declining consumer confidence, horrific retail sales, a NEGATIVE Q1 GDP report, companies missing earnings, ground wars, or a downed civilian airliner.

The standard line of thinking is that as long as Interest rates are this low, investors have no choice but to buy stocks, since bonds don't pay anything.  Yes, that is true, but all investors have seen ‘bubbles’ where stocks have fallen 50% or more.  While everyone says: “This time it’s different.”  We all know that: “Bubbles pop with the right pin.”

As the phrase goes: “Don’t fight the tape.”  Therefore, it’s becoming more and more likely that buying the dips will be in vogue through the end of the year.  I continue to look for the ten-year bond to remain below 3.5%.  The U.S. equity markets (in normal times) are simply a discounting mechanism for earnings.  As the old investor once said: “Sell the Bugle, and Buy the War.”  What this means is that, the run-up to a major conflict (anticipation of a war) puts the markets under pressure, but once the war begins the markets tend to rally in anticipation of the war’s end.  Currently the market is anticipating an economic recovery; however if the recovery does not gain momentum, the markets will selloff.

Unfortunately, the more optimistic the market becomes – the easier it is to disappoint.  It is much easier to surprise a market to the upside, when expectations are muted.  So in addition to my worry over economic growth, housing continues to bother me.  Homebuilding is struggling to regain momentum due to tight lending conditions, rising mortgage rates, and a lack of momentum in new household formation.  Additionally, there has been a disturbing decline in the most recent consumer spending numbers. 

Obviously the old quote: “The trend is the trend – until it’s NOT” – still holds true.  I’m cautiously optimistic.  But I’m sitting in a lot of cash right now.  Be safe out there.


For this coming week – we are into earnings season.  A common technique of making money during earnings season is to (the day before a specific company’s earnings to be are announced): SELL a weekly Iron Condor (specific to that company), that is 1.5 to 2 standard deviations (SD) away from the current stock price.  For example: NetFlix (NFLX) has earnings after the bell on Monday.  NFLX is currently trading about $445 – with a standard deviation of $35.  This means that this week, NFLX should move a maximum of $35 (either higher or lower) than it’s existing $445 stock price.  Now multiplying $35 by 1.5 and 2, yields $50 and $75 respectively.  Therefore using the 1.5 SD numbers – the range for NFLX is between: $395 and $495.  You could SELL the $390 / $385 - $500 / $505 Iron Condor – netting you almost $0.90 per share.  SELLING 20 contracts would net you a little over $1,750 at the end of the week – providing that NFLX remained LESS than $500 and MORE than $390.  Using the 2SD numbers – the range for NFLX is between: $375 and $515.  You could SELL the $375 / $350 - $515 / $540 Iron Condor – netting you almost $1.20 per share.  SELLING 20 contracts would net you approximately $2,400 at the end of the week – providing that NFLX remained LESS than $515 and MORE than $375.  In principle – what you’re doing – is taking advantage of NetFlix’s high ‘implied volatility’ (IV) that proceeds their earnings release (as nobody knows what numbers the company will report) – and then the immediate IV ‘crush’ that happens after earnings when the world immediately knows the numbers and has settled on a firm (new) price per share.  Some other examples for this week are:
            CMG               -525 / +522.5 & -660 / +665           Iron Condor OR
            CMG               -495 / +475 & -690 / +710              Iron Condor
            SBUX             -74 / +72 & -82 / +84                       Iron Condor
            FFIV                -99 / +96 & -112 / +125                   Iron Condor
            WYNN            -192.5 / +190 & -210 / +212.5       Iron Condor

Last week certainly was an interesting week, and could foreshadow things to come.   Apple (and the pinning play) was obviously a complete disappointment to me – and I ended up holding some Apple shares as they head into their earnings announcement on Tuesday of this week.  I also did NOT like the action in the IWM (a small cap index) early last week – so I sold out of most of my small company stocks before the market’s move downward.  We continue to hold MNKD and DRTX, even though Ms. Yellen (during her testimony to Congress) did single out social media and bio-tech stocks as being over-valued.  #ThanksJanetYellen.  Our other option plays worked out nicely including:  AMZN, BITA, BWLD, GOOGL, NUGT, SHPG, and VIPS.  I’m currently sitting in an over-sized cash position – ready to ‘pounce’ upon such earnings plays as:  NFLX and CMG on Monday, AAPL and APD on Tuesday, MMM and FFIV on Wednesday, SBUX on Thursday, and WYNN on Friday – to name a few.

My current short-term holds are:
-       AAPL (Tech) – in @ $92.86 – (currently $94.49),          2% increase / 0.5 mo.
-       ADSK (Tech) – in @ 55.25 – (currently $57.36),            4% increase / 0.25 mo.     
-       COST (Retail) – in @ $115.12 – (currently $117.74)    2% increase / 0.5 mo.
-       DRTX (Drug) – in @ $13.61 – (currently $15.08),         11% increase / 2.5 mo.
o   (Put Credit and Call Credit Spread Premiums not calculated into results)
-       FEYE (Tech) – in @ $28.05 – (currently $34.52),          23% increase / 2.5 mo.
o   (Put Credit and Call Credit Spread Premiums not calculated into results)
-       FET (Energy) – in @ $30.53 (currently $35.72),            17% increase / 2.0 mo.
-       KO (Beverage) – in @ $41.17 – (currently $42.43),      3% increase / 0.25 mo.
-       LNG (Energy) – in @ $57.40 – (currently $72.83),        27% increase / 2.0 mo.
o   (Put Credit and Call Credit Spread Premiums not calculated into results)
-       MNKD (Drug) – in @ $6.35 – (currently $9.80,             56% increase / 2.75 mo.
o   (Put Credit and Call Credit Spread Premiums not calculated into results)
-       NUGT (Gold) – in @ $46.10 – (currently $47.83),         4% increase / 0.5 mo.
o   (Put Credit and Call Credit Spread Premiums not calculated into results)
-       PCLN (Tech) – in @ 1211.10 – (currently $1212.78),  0% increase / 0.25 mo.
-       TLT (Bonds) – in @ 112.32 – (currently $114.52),        2% increase / 0.25 mo.
-       TTWO (Tech) – in @ 21.10 – (currently $23.22),           5% increase / 0.25 mo.     
-       SLV (Silver) – in @ $20.17 – (currently $20.02),            -1% increase / 0.75 mo.
-       SIL (Silver) – in at 24.51 - (currently 14.24) – no stop,
-       GLD (ETF for Gold) – in at 158.28, (currently 126.13) – no stop ($1,339 per physical ounce), AND
-       SLV (ETF for Silver) – in at 28.3 (currently 20.02) – no stop ($21.48 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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