This Week in Barrons – 7-6-2014
The HERE and NOW…
Most people live in a very ‘Now-focused’ world. From alarm clocks in the morning to the 11 o’clock news in the evening – working virtually around the clock, being on call all weekend, and answering texts and emails 24/7. This is our current measure of progress. There’s a certain irony in the fact that the largest selling drugs are for: Hypertension, Antacids, Anti-depressants, and Erectile Dysfunction. Evidently we've progressed ourselves into a nation of worried, upset, depressed, and libido challenged individuals.
Factually we do live in a ‘dot com’ era where everything spins at incredible speed, but basic elements are falling through the cracks. For example – I worry:
- About a recent study showing that children are now only capable of mental focus for 30 seconds at a time – a period remarkably similar to a TV commercial.
- About a recent poll showing that 63% of those polled thought that Belgium was a craft beer.
- About us continuously spending less time on ‘RE-search’ and more time on ‘ME-search’.
- About our Federal Reserve telling us that they’re worried about ‘DE-flation’ – while anyone who’s shopped for food, gasoline, insurance, education, or clothes in the past decade continues to be worry about ‘IN-flation’ and making ends meet.
- About Wal-Mart being the nations top employer. Because I'm not sure how many people are worried that the velocity of money has crashed, or that J.P. Morgan has a derivative book of $70 TRILLION – which is 5 times more than the entire United States GDP.
- About Oracle thinking that it was a good investment to use $21 Billion of their own dollars to buy back their own stock – and then proceeded to badly miss earnings.
I worry that we’re spending too much time in the ‘here and now’ and not enough time analyzing the future impacts of some of our decisions: For example – I worry:
- About California, where the biggest shortage in hospitals (right now) is the lack of language ‘translators’ to deal with the flood of Spanish speaking patients. Many hospitals are seeing more than 1,000 additional patients per week (due to Obamacare) and over 70% do not speak English.
- About more states pushing to legalize marijuana, presumably for tax income purposes. Do we really think that a 6-month legalization period in Colorado is enough time from which to set a benchmark?
- About our coup in the Ukraine failing, but succeeding in turning their gas supplies off and bankrupting the country.
One small news item did prove to me that others are ‘aware’ of our ‘sound-byte’ culture, is that an Israeli lawyer has asked the U.S. courts to shut down Iran's Internet DNS addresses. This particular law firm finds Iranian assets, seizes them, and then distributes the money to the victims of Iranian terror groups. They have sued to have the Internet domain name managers shut down the destination ".ir" (which is Iran). If Iran’s goes Internet dark, it would make it very hard for any news to be released. Could this be the prelude to Iran being attacked, and someone not wanting pictures and videos to be seen?
I understand why so many of us live in the ‘here and now’, and are only focused on the next day. Things are moving incredibly fast, and it takes valuable time to take a break from the ‘here and now’ and look at the other side of the picture. Unfortunately, it’s only by estimating and planning that you get a real view of what really matters. On this holiday weekend, give yourself a break from the Matrix, because there’s nothing more interesting than the truth that surrounds you.
Monday was the end of the 2nd quarter. This is when stockbrokers like to ‘Paint the Tape’ (otherwise known as ‘Window Dressing’). This is where brokers buy the winning stocks (right before quarter-end) in order to look like they were geniuses for being in on all of that quarter’s winners. That way when the quarterly statements go out, everyone looks and says: "Wow look at this, my guy had XYZ stock, and it did great!" In addition to the ‘Window Dressing’ activity, the FED was more than happy to help the cause by doing the biggest reverse-repo in history of over $340B. On Tuesday that giant repo unwound and the animal spirits were unleashed within the trading pits. Between the ‘First of the Month’ money and all those billions rushing back into banks from the FED, they were able to put together a nice 120 point DOW gain.
The middle of the week put us into ‘pause mode’ because with the holiday shortened week – the initial jobless claims and the non-farm payrolls reports would come out on Thursday rather than Friday. People were worried that if the jobs report came out too strong, then the markets would sell-off because it could signal oncoming FED rate hikes. On the other hand, a bad jobs number might be rewarded with more buying as ‘just maybe’ the FED would end the taper. This market likes free FED money a lot more than it likes a solidly functioning and growing economy. Good news often causes the market to panic because they fret over the FED's pulling the punch bowl away, while bad news often causes a sigh of relief. It’s upside down, but it’s reality.
While the market was anticipating Thursday’s jobs numbers – it appears that one of our predictions (concerning the status of the U.S. dollar as the global reserve currency) is beginning to come true. Last week, the Chief Executive of France’s largest oil company, Christophe de Margerie said he sees no reason for oil purchases to be made in U.S. dollars – adding that it makes sense to expand the use of other currencies in transactions, especially outside the U.S. “Nothing prevents anyone from paying for oil in euros,” de Margerie told journalists at the Cercle des Economistes conference in Aix-en-Provence, France. “The price of a barrel of oil is quoted in dollars. A refinery can take that price and using the euro-dollar exchange rate on any given day, and agree to make the payment in euros.” What sparked this debate is the $8.97 billion fine that the U.S. slapped on the French bank BNP Paribas (BNP). French Finance Minister Michel Sapin said this week that the BNP fine raises questions about the reach of U.S. laws because the bank’s transactions were not illegal in Europe. Sapin said European countries should look for ways to use the euro more frequently and that he will raise the matter with fellow euro-area finance ministers when they meet in Brussels on July 7. “Shouldn’t the euro be more important in the global economy?” Sapin asked journalists in Paris. “We have to consider the weight of the dollar and the consequences of pricing things in dollars when it means that American law applies outside the U.S.”
Then on Thursday the jobs numbers were released, and outwardly it was a good report – showing a gain of 288K jobs and the unemployment rate dropping from 6.3% to 6.1%. As we looked inside the jobs number we found:
- U.S. Birth/Death Model added 121 thousand (42%) of those jobs.
- The labor force participation rate remained low at just 62.8%. A reading this low has not been seen since the 70’s.
- The number of people holding part time jobs for "economic" reasons increased by a whopping 275K. What are economic reasons? First - potentially those are the only jobs that they can find. And second - companies are changing full-time workers into part-time workers to avoid Obamacare.
- Hourly earnings increased by 0.2%, but I’m not sure we can call that a win given we’re moving a lot of people from a 40-hour to a 29.5-hour workweek.
- The unemployment rate fell from 6.3 to 6.1% - due to a staggering number of people leaving the workforce.
- And, for the 5th month in a row the ‘job-LESS’ number came in higher than anticipated.
When analyzing the unemployed – it appears that 40% of unemployed workers (4.6M) are Millennials (according to the Georgetown University Center on Education and the Workforce). The millennial unemployment percentage is greater than Generation X (37% = 4.2M) and Baby Boomers (23% = 2.5M). And a staggering 2 Million of the 4.6M unemployed millennials are termed 'Long-Term Unemployed'.
This Jobs number did put the market in a Holiday mood and it responded by hitting yet another all-time record high – with the DOW topping 17,000. But (as it has done lately) it has gone a bit too far too fast. So I'm in the camp that suggests we'll probably see a bit of ‘backing and filling’ this week as the market digests its gains. So don't be surprised to see some red on the indexes this week.
While the biggest mistake someone could have made this year was not being ‘IN’ the markets – honestly, this continued rise (on low volume) to all-time highs day after day is simply unsustainable. A pause (or shallow pull back) is likely and I think it might hit this week. Soon we're going to enter earnings season, where companies will be reporting their second quarter results, and you can bet there will be a lot of pops and drops to celebrate.
This past week I have been very diligent about putting a summary of all of my daily trades out in Twitter and in StockTwits between 4:15 and 4:30 EDT each day.
A fairly easy method of making money in an ‘up market’ is to SELL premium. Often that is accomplished by selling a Put Credit Spread (PCS’s) on a particular stock or index. A couple thoughts along those lines are as follows:
- SELLING premium is a good thing, as 80% of all options sold expire worthless – and you would like to be on the ‘SELLER’ of those trades.
- Often you can sell ‘Call Credit Spreads’ when a stock appears to be falling or ‘topping’ and sell ‘Put Credit Spreads’ when a stock is rising or putting in a ‘floor’.
- A Put Credit Spread is where you sell a PUT Option at a given strike price, and buy another PUT option at a lessor strike price as protection. If the stock continues to rise – you will gain the difference between the premium you sold and the option you purchased for protection.
- Buying the ‘protection PUT option’ somewhat slims your profits, but guarantees a much smaller loss if you’re wrong about the direction of the stock.
- For example: Cheniere Energy (LNG) – appears to be firing on all cylinders with its stock more than doubling over the past 12 months. It is currently trading at $72.52 per share. If you believe that it will continue along the same direction – then you can SELL the weekly $70 PUT option for $0.27 and BUY the $65 PUT option for $0.05 (as protection against any bad news). As long as the stock remains above $70 / share this week, you would ‘pocket’ the $0.22 / share at the end of the week.
We had a tremendous week last week, and this week I’m looking for the markets to (in general) trade sideways and down. Therefore, selling premium on Call Credit Spreads (CCS’s) should be on the menu. I’m still holding:
- COST – Bought: October $115 Calls
- AAPL – Bought: October $85 Calls
- FEYE – Sold: July Weekly $41 CC’s (Cov. Calls), & $36 / 33 PCS
- MNKD – Sold: July Weekly $11 CC’s, & $9 / 7 PCS
- BWLD – Sold: July Monthly $150 / $140 PCS
- GOOGL – Sold: July Monthly $535 / 530 PCS
- HD – Bought: September $77.50 & $85 Calls
- KO – Bought: November $39, $40, $44, and $45 Calls
- NUGT – Sold: July Weekly $49 CC’s, & $42.5 / $39.5 PCS
- SHPG – Sold: July Monthly $205 / $200 PCS
- TLT – Bought: September $110 & $116 Calls
- USO – Bought: January 2015 $41 Calls
- VIPS – Sold: July Monthly $160 / $150 PCS
- WDC – Bought: July $90 Calls
- WWAV – Bought: October $30 & $37.5 Calls
- X – Bought: July $24 Calls
Reviewing our Past Week’s Performance:
- Mannkind Pharmaceutical (MNKD) – continues to be manipulated and pinned at exactly $10 on Friday – so we are resigned to just collecting weekly premium by SELLING the Covered Calls (CC’s) and Put Credit Spreads (PCS’s) until they announce their major partnership / merger in 4 to 6 weeks.
- FireEye (FEYE) – continues to be a real horse – even after pulling back slightly this week. It has its sights on $40+ and in the meantime we’re collecting premium by SELLING CC’s and PCS’s.
- Durata Therapeutics (DRTX) – closed at $17.90 on Friday – allowing us to pocket the entire premium that we sold. We’re continuing to hold onto our position a little while longer and SELL CC’s and PCS’s.
- Cheniere Energy (LNG) – is continuing to look like the poster child for a rising stock chart. Nothing much to do with LNG other than ‘sit on our hands’ and SELL CC’s and PCS’s.
- My energy portfolio (comprised mostly of small energy companies) continues to perform nicely (see below):
My current short-term holds (returning > 15.7% for June) are:
- DRTX (Drug) – in @ $13.67 – (currently $17.90), 32% increase / 2 mo.
- FEYE (Tech) – in @ $28.05 – (currently $38.95), 39% increase / 2 mo.
- LNG (Energy) – in @ $57.40 – (currently $72.52), 26% increase / 1.5 mo.
- MNKD (Drug) – in @ $6.35 – (currently $10.00), 57% increase
o (Covered Call Premium / Income Plays in all of the above…)
- AKRX – In @ $30.96 – (currently $33.91), 10% increase / 10 days
- ASX (Tech) – in @ $5.81 (currently $6.87), 18% increase / 1.5 mo.
- BAS (Energy) – in @ $25.94 (currently $28.95), 11% increase / 2 wk.
- BRS (Energy) – In @ $75.07 (currently $80.26) 7% increase / 1 wk.
- FET (Energy) – in @ $30.53 (currently $36.33), 19% increase / 1.5 mo.
- GTAT (Tech) – in @ $18.09 (currently $19.55), 9% increase / 10 days
- HK (Energy) – in @ $5.25 – (currently $7.36), 40% increase / 1.5 mo.
- IDTI (Tech) – in @ $15.03 – (currently $15.56), 4% increase / 1 wk.
- KOG (Energy) – in @ $12.98 – (currently $14.36), 10% increase / 3 wk.
- LSCC (Tech) – in @ $7.85 – (currently $8.50), 8% increase / 2 wk.
- LSG (Gold) – in @ $0.92 – (currently $0.92), 0% increase / 1 wk.
- PQ (Energy) – in @ $5.87 – (currently $7.43), 27% increase / 1.5 mo.
- PVA (Energy) – in @ $14.57 – (currently $16.34), 12% increase / 1.5 mo.
- RFMD (Tech) – in @ $7.96 – (currently $9.88), 24% increase / 1.5 mo.
- SLV (Silver) – in @ $20.17 – (currently $20.29), 1% increase / 1 wk.
- SPIL (Tech) – in @ 7.20 – (currently $8.59), 19% increase / 1.5 mo.
- SQBC (Retail) – in @ $13.81 – (currently $14.04), 1% decrease / 1 wk.
- STIKL (Energy) – in @ 13.51 – (currently $14.07), 5% increase / 1 wk.
- SIL (Silver) – in at 24.51 - (currently 14.39) – no stop,
- GLD (ETF for Gold) – in at 158.28, (currently 127.02) – no stop ($1,320 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 20.29) – no stop ($21.18 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.