This
Week in Barrons – 7-27-2014
Under Our Very Noses
"It's unbelievable how much you
don't know about the game you've been playing all your life." — Mickey
Mantle
For the past several weeks we've
been talking about the global picture – from the mess in the Ukraine to missing
airliners, and from the holocaust in Gaza to the BRICS bank – all focused
around the U.S.’s impending loss of it’s world reserve currency status. Let’s change our focus back to U.S. based
news and events over the past 5 years, and see if there is a discernable pattern:
-
The
NSA Originally – they NEVER recorded individual phone
conversations, and now they are logging EVERY single communication made in the
world.
-
The
IRS Originally they NEVER targeted anyone, and now we find that
they were instructed to target anyone that disagreed with King Obama. Add to this ‘the miracle of improbability’ –
when Lois Lerner’s hard drive (along with 6 others in the IRS) crashed (all at
the same time) with ZERO data recoverability.
(FYI - the odds of this happening ‘by chance’ have been placed at 1 in
500 Trillion.)
-
“If
you like your plan, you can keep your plan." Sorry
Ms. Pelosi. YOU passed the bill, (and because
we’re still bickering about it in the courts) WE still don’t know what’s in it.
-
John
Corzine Remember John and MF Global absconding
with $1.3 Billion dollars of investor’s capital. When questioned about the money he said: “I
simply don't know where the money is".
And nobody went to jail.
-
GAAP Remember
GAAP (Generally Accepted Accounting Procedures) – Obama now allows banks to
report their assets per a computer model’s estimated worth, rather than what
the market would really pay for them.
-
GDP
calculations In an effort to
make things ‘look better’, an entire host of new things have been added to the value of the new economy – such
as TV re-runs. And the U.S. GDP still
lost 2.9% in the first quarter of 2014.
-
QE
1, 2, The Twist, and now QE3 We lived through the failure of QE1,
QE2, and The Twist. All of these escorted in a Zero Interest Rate Policy
that has distorted our economy and our markets for years.
-
Labor
Participation Rate While Obama tells us that he has engineered
the greatest and fastest recovery in history – we have LESS people actively in
the job market than we did in 1973.
-
Food
Stamps An all-time high, 50 Million people are on food stamps or
related programs.
-
EPA
Waging War Never before has a standing President been
actively behind rules created by a ‘Non-Elected Body’ that will put an entire
industry (Coal) out of business.
-
Velocity
of Money VOM reflects the health of an economy
because it demonstrates how fast money is changing hands. The higher the velocity – the better the
economy. Our VOM is at 70 year lows, not
seen since World War II.
-
Gold
and Silver manipulation At least everyone admitted it, and it made
the news.
-
LIBOR
manipulation In what might be the biggest fraud
ever uncovered, we found that LIBOR rates were being manipulated.
The list goes on, but that’s one
heck-of-a-lot of financial insanity for the past 5 years. As an aside: I’m not sure that anyone noticed
but the ‘spring planting season’ in the Ukraine has been fairly dramatically
disrupted. The Ukraine is called ‘the
bread basket’ for a reason – and it is because they normally would supply not
only Ukraine, but also a lot of Europe with wheat. This fall, there is not only a serious possibility
of food shortages, but also shortages in Russian natural gas pipeline in-flows
as well.
All of this brings us to the
FED. I remember saying a full year ago:
“If the FED does not change it’s stance on tapering (or begin a new program of
injecting liquidity) before the summer of 2014, then something major has
changed.” Well, only 3 months remain
from the end of QE3, and they have announced no new plans. You can point to the repos and the foreign
institutions that continue to buy our paper, but that’s not a long term fix and
honestly it removes the façade of the FED being ‘transparent’. If these
elements were to continue, Congress would scream that the FED didn't stop the stimulus
– they just hid it – and that would be an ugly scene. The taper combined with no new programs could
be a final, desperate attempt to show the world that: The U.S. is finished debasing
its currency – and there’s no reason to run to the BRICs Bank. Heck, Ms. Yellen has stated that QE is going
to end, and that rates will be rising sooner rather than later. Of course (in the following sentence) she said
that it’s NOT the FED's job to pop bubbles, and keeping rates low has prevented
troubles in repaying debt loads that would have hurt the economy.
Honestly, everyone that I know has
predicted that the FED will print into eternity, bring on hyperinflation, and an
end to our current financial systems.
However, as a way out of this dilemma, I can see Ms. Yellen addressing
Congress with the following fable: “The economy had healed. Our accommodative stance was actually
hindering faster growth, so the Federal Reserve decided to get out of the way
and let market forces take over the recovery. That was going well until [FILL IN THE BLANK]
happened.” The [Fill in the Blank]
could be: (a) a hot war with Russia, (b) a chain reaction of banking failures, (c)
a mass exodus of nations from NATO into the willing arms of the BRICs, or (d)
the ‘WEATHER’.
If Ms. Yellen halts the taper or
even reverses it by announcing some new policy to take over – then things are
back to normal. If Mr. Draghi finds a
way to pervert the EU constitution, and to begin printing money like a mad man
– then things are back to normal. But if
the FED halts QE and rates start to rise, then I have to guess that we're going
to see some form of major event taking place. An event the FED can point to as the cause for
any market crash or economic recession.
And all of it occurred – right under our very noses.
The Market...
Small-caps tend to get lot of
attention by traders and investors because of their tendency to outperform
bigger companies over large markets cycles. Many of these small-cap companies tend to
trade with less dollar volume, are highly sensitive to domestic growth
expectations, and can be seen as a good indicator of risk and investing sentiment. I realize that everyone is focused on the
S&P Index, but the reality is that many stocks in the U.S. have been
struggling in 2014, with the small-cap Russell 2000 index being a key indicator
of just how tough it's been. The Russell
2000 has meaningfully underperformed the S&P 500 this year in a shocking
way, even causing it to give back all of its 2013 gains. The movement by the Russell 2000 is nothing
short of being utterly brutal, and came out of nowhere. Investors often equate a narrow rally to one
that is close to the end. The analogy of
using a ‘staircase’ to invest upward, and using the ‘elevator’ to invest
downward is not lost on me. The complete
collapse of the Russell 2000 is a humble reminder that advances can be given
back in a moment's notice – when you least expect it – regardless of asset
class, strategy, or market cap.
As if to add insult to injury, the International
Monetary Fund (IMF) on Wednesday announced that it expects the U.S. economy to
grow 1.7 percent in 2014. This is a rate
even SLOWER than it predicted a month ago.
U.S. GDP contracted at a 2.9 percent rate in the first three months of 2014
(the sharpest decline in 5 years) - dragged down by a weak housing market, a
slower pace of restocking by businesses, and lower exports. The IMF went on to say that these lower growth
expectations will contribute to continued slack in the labor market for the
next three to four years. The IMF also
warned that an aging U.S. population meant the economy would not be able to
grow above 2 percent in the longer-term without significant reforms, including
tax and immigration changes, more investment in infrastructure and job
training, and the provision of childcare assistance, which could help lure more
Americans back into the workforce.
Using the above as a backdrop, it
feels like things are about to get interesting in ‘market land’. This week we only had one up day, and the
week ended quite red. While in the big
picture, one week’s decline is statistically insignificant, but some ‘internal’
market damage has been done. Combining
abysmal market volume with the performance of the Russell 2000, I’m seeing the
market climbing higher on very low volume and fall ‘like a rock’ on high volume.
In fact, last Friday snapped a streak of
11 green Friday closes. Was that just the market's way of not letting
everyone make profits on a known pattern, or was it something more
significant?
We are (yet again) set up for a nice
pull back.
-
Earnings
season is winding down.
-
The
Geopolitical scene is bad, and getting worse.
-
Our housing
slump continues.
-
And
currently, the only reason for this market to hold up is the upcoming mid-term elections.
This week I’m looking for a bit more
market weakness. This market can fall
quite a ways, and still be above some significant support levels. So if you’re playing, please play carefully.
Tips:
This week I would like to show you how to invest for
income. That is to say, make weekly
income (cash in your pocket) – irrespective of how the market moves. One of the best mechanisms to do this is via
‘Credit Spreads’. The credit spread is flexible
and can be used as a non-directional or a directional trade. I use it as a consistent source of income. Typically I look for stocks that don’t have a lot
of price movement. Credit spreads use the
passage of time to generate profits. Often
you don’t have to do much with these trades, but put them on and let them work. And (depending upon how you set the trades
up), it’s one of the few trades where you can make money on at least 2, and
often all 3 of the ways a stock can move (up, down, or sideways). These trades can be set up to generate
weekly, monthly or even multi-month income streams.
So what exactly is a Credit Spread? It involves selling an option, and buying
another option against it. Now, before
your eyes start glazing over, they are very simple to build. Conceptually, if you SELL a ‘Call Credit
Spread’ on a stock – you will always make money if the stock moves sideways, or
down – and you could make money even if the stock moves up. When you SELL a ‘Put Credit Spread’ on a
stock – you will always make money if the stock moves sideways, or up – and you
could make money even if the stock moves down.
So the odds are with you with Credit Spreads, and you’re SELLING them –
so cash is hitting your account virtually immediately. As the saying goes: “More homes in the
Hamptons have been built on credit spreads than anything else.”
Below are 3 examples / recommendations of credit spreads for
August.
-
The
1st example is a Put Credit Spread on Time Warner (TWX). I would SELL the August $80 PUTS, and BUY the
August $77.50 PUTS as protection. The
entire transaction would net me $0.35 per share – and would expire on the 3rd
Friday in August. Here we are saying
that TWX will stay above $80 / share.
It’s currently trading @ $85, with an expected move of $4.50, and a
buyout offer on the table.
-
The
2nd example is a Call Credit Spread on the Nasdaq itself. I would SELL the $4,050 CALLS, and BUY the $4,075
CALLS as protection. The entire
transaction would net me $3.40 per share – and would expire in August. Here we are saying that NDX would remain
below $4,050 per share. It’s currently
trading for $3,965, with an expected move of $52, and a downward bias in place.
-
The
3rd example is a Put Credit Spread on Devon Energy. I would SELL the August $73.50 PUTS, and BUY
the August $71 PUTS as protection. The
entire transaction would net me $0.20 per share – and would expire in
August. Here we are saying that DVN will
stay above $73.50 / share. It’s
currently trading @ $78, with an expected move of $3.70, and it’s in the ‘hot’
Energy Sector.
TWX
August -80 / +77.5 Put Credit Spread (PCS) $0.35,
NDX August -4050 / + 4075 Call
Credit Spread (CCS) $3.40,
DVN August -73.5 / +71 Put
Credit Spread (PCS) $0.20
Last week, other than the exercise in stock price
manipulation brought on by Tourbillion Capital Partners’ Jason Karp against
Mannkind Pharmaceuticals, and the earnings miss exhibited by Coca-Cola – the
week went fairly well for us. A lot of
our old guard (FEYE, LNG, AAPL, NUGT) performed nicely, all the while the vast
majority of the earnings plays also did well – including: CMG, BIDU, BIIB,
DECK, FB, FFIV, GILD, ISRG, SBUX, and V.
We exited our position in DRTX this week. Ever since we exited our positions in
small-cap stocks (about 2 to 3 weeks ago), I continue to like bonds (TLT) and
am beginning to warm up to oil (USO) and the precious metals – potentially in a
flight to quality.
My
current short-term holds are:
-
AAPL
(Tech) – in @ $92.86 – (currently $97.67), 5%
increase / 0.75 mo.
o
(Options
Spread Premiums not calculated into results)
-
ADSK
(Tech) – in @ 55.25 – (currently $55.23), 0%
increase / 0.5 mo.
-
COST (Retail) – in @ $115.12 – (currently
$117.55) 2% increase / 0.75 mo.
-
FEYE (Tech) – in @ $28.05 – (currently $37.15),
32% increase / 2.75 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
FET
(Energy) – in @ $30.53 (currently $35.41), 17%
increase / 2.25 mo.
-
GME (Tech) – in @ 42.12 – (currently $45.68), 8%
increase / 0.25 mo.
o
(Option
Premiums not calculated into results)
-
KO (Beverage) – in @ $41.17 – (currently $41.00), 0% increase / 0.5 mo.
-
LNG
(Energy) – in @ $57.40 – (currently $75.45), 31%
increase / 2.25 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
MNKD
(Drug) – in @ $6.35 – (currently $8.78), 38% increase / 3 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
- NUGT (Gold) – in @ $46.10 –
(currently $47.16), 4% increase / 0.75
mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
TLT (Bonds) – in @ 112.32 – (currently
$115.67), 2% increase / 0.5 mo.
-
TTWO (Tech) – in @ 21.10 – (currently $23.51), 6% increase / 0.5 mo.
-
SLV (Silver) – in @ $20.17 – (currently $19.87),
-1% increase / 1 mo.
-
SIL (Silver) – in at 24.51 - (currently 14.13)
– no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
125.79) – no stop ($1,308 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 19.87)
– no stop ($20.76 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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