RF's Financial News

RF's Financial News

Sunday, August 10, 2014

This Week in Barrons - 8-10-2014

This Week in Barrons – 8-10-2014

The Good, The Bad, and the Real Ugly:

The Good:     The other day I was standing in line next to a retired Air Force Colonel – when he struck up a conversation by saying: “The level of competence in the U.S Government has reached new lows”.  This brought me to thinking: What if the U.S. Government hired the management of Wal-Mart to either run or at least fix the government?  Thanks to JLA for reinforcing this thinking.  First, do we have a problem?  The facts are:
-       After 237 years, the U.S. Postal Service is broke.
       After 77 years, the Social Security Office is broke.
       After 47 years, Medicare and Medicaid are broke.
       After 42 years, Fannie Mae and Freddie Mac are broke.
       After 48 years of having the War on Poverty transfer over $1 trillion a year to the poor – it is in worse shape than ever.
       After 37 years, the Department of Energy (established to lessen our dependence on foreign oil) has ballooned to over 16,000 employees, with a budget over $24 billion – and we still import more oil than ever before.
       And finally, customer satisfaction within all 3 branches of our government has fallen to record lows: Supreme Court = 30%, Congress = 7%, and a 6-year low for President Obama = 29%.

Can Wal-Mart handle something as large as the U.S. Government?
-       Efficiency & Scale:   Americans willingly spend $36,000,000 at Wal-Mart every HOUR – producing a $20,938 profit every MINUTE.
       Global Reach:          Wal-Mart has 1.6 Million employees worldwide.  This year 7.2 billion different purchasing experiences will occur at Wal-Mart.  (The Earth's population is approximately 6.5 Billion.)
       Growth:                      Wal-Mart has over 3,900 stores in the U.S. – growing at approximately 200 stores per year.
       Accessibility:             93% of all Americans live within fifteen miles of a Wal-Mart.
       Customer Satisfaction:      Wal-Mart’s customer satisfaction scores are more than double those of the Supreme Court and President Obama, and over 10 TIMES those of Congress.

I am NOT complaining.  I’m simply stating that the U.S. Government should HIRE the management team of Wal-Mart to run our country.

The Bad:        Consider this: if you purchased wood (to fuel your stove) from the sawmill in the next town, would you place sanctions on the sawmill and try to make their life miserable?  Probably not.  Why - because the sawmill would simply stop shipping you their wood, causing your stove to go out, and then you wouldn’t be able to cook your meals or heat your home.  And you can bet on that sawmill stopping your wood shipments as soon as the weather turned colder.  

Well, Russia supplies most of Europe’s gas, and many of their food products.  In response to U.S. sanctions, Russia's retaliations (via restricting European imports) are beginning to wreak havoc on German and Norwegian businesses.   When you disrupt an economy, the immediate impact is centered on the target businesses (a calculated reaction); however, the ripple effects of the economic disruption are felt long after and are often mis-calculated (to the downside).

We sanctioned Russia to make a statement, and to try and get Russia to back down from the Ukraine, OR to drag Russia into a ‘street fight’ with the U.S. and the NATO countries.  The sanctions were supposed to ‘break Russia down’.  Instead, Germany's exports are falling like a rock.  Our sanctions on Russia are hurting Europe more than they're hurting Russia. 

Currently, U.S. exports to Russia have fallen by 34%.  With exports falling, idled jobs are quick to follow.

The Ugly:       In the early 1960's (at the height of the cold war), we were within minutes of WW3 with Russia.  Russia wanted to place missiles on their military base in Cuba – just 90 miles from the U.S. border.  The U.S. could not tolerate nuclear missiles so close to our border, and went head-to-head with Russia.  As the supply ships were coming from Russia to Cuba, we set up a naval blockade around the island.  Times were tense.

On October 27, 1962, the American destroyer USS Beale began dropping depth charges on the nuclear-armed Soviet submarine B-59, which was lurking near the U.S. blockade line around Cuba.  The charges were non-lethal warning shots intending to force the sub to the surface, but the submarine's captain mistook them for live explosives.  Convinced he was witnessing the opening salvo of World War III, the captain angrily ordered his men to arm the submarine’s lone nuclear-tipped torpedo and prepare to attack.

If not for a contingency measure that required all three of the submarine's senior officers to sign off on a nuclear launch, we would have been in a nuclear war with Russia.  The Soviet captain wanted to shoot his nuclear-tipped torpedo, but Vasili Arkhipov (B-59's second in command) refused to give his consent.  After calming the captain down, Arkhipov coolly convinced his fellow officers to bring B-59 to the surface and request new orders from Moscow.  As soon as the submarine surfaced – it was told of the negotiated truce, told to back down, and to return to Russia.

Did you know that this was not reported for almost 40 years?  Why, because the agencies involved were too embarrassed.  If not for the courage of ONE MAN (a second in command), nuclear war and probable global destruction were assured.

Today the roles are reversed.  It is the U.S. and NATO that want to put our missiles on Russia's front porch.  It is natural that Russia doesn’t want this to happen.  And so we ask ourselves:
-       1st - Without Wal-Mart to run our country, where are we heading?
-       2nd - By establishing sanctions that hurt us and our allies more than the intended target – what are we trying to prove?
-       And lastly - WHO and WHERE is that ONE person that will step-up to prevent the firing of that first nuke – and back us all down to a discussion between reasonable people.

The Market:

You must admire creativity.  In a push to make more people eligible for loans, our government has asked that the method of calculating FICO scores (credit scores) be changed.  Currently, when you have negatives on your report (non-payment, collections, late fees, etc.) it affects your score and often results in either a ‘no credit decision’ or an interest rate so high you can't afford the loan.  Currently, 77 million people (over 25% of our total population) are undergoing collection efforts – increasing their FICO scores and making it hard for those 77 million to get additional loans.

In the new plan, if you've gone into collection (where a collection company is hounding you for payment) and you finally pay – the record of you going into collection will NO LONGER be included in your FICO score calculation.  So, if you buy a car you can't afford and you go to collection, and if you finally settle and pay your bill (normally for 50% of the original charges), all of those collection efforts will no longer be reflected in your FICO score.  So while we poke ourselves in the eyes with backfiring Russian sanctions, we're going to try (once again) to ignite a housing bubble by allowing A&B (alive and breathing) accounts to buy homes.  What could go wrong with that idea?

This was interesting week in the market.  On Monday we had a bounce that only lasted a day, and on Tuesday we fell again.  Wednesday we were green by 13 points, but on Thursday the trap door opened and we fell like a rock.  On Friday, none of the politicians wanted to be on the weekend talk shows explaining why the market is puking, so they created a green market by recycling old news:
-       A ‘tweet’ by the Russian agency stated that military maneuvers near the Ukraine border were ending, and that stared all of the algorithms firing-off (in unison) over the good news.
-       The only issue was that it was ‘old news’.  It seems that four days earlier Russia announced that it would be ending the drills on Friday.

So they manufactured a bounce – what else is new?  Does this bounce have staying power?  I think that if nothing goes ‘bump in the night’ over this weekend, then yes – we should see a bit more follow-through to the upside on Monday.  But for the longer term:
-       Is the FED going to reverse the tapering on QE?  I doubt it.
-       Is the situation in the Ukraine any better?  Nope, it's worse.
-       Is the conflict between Israel and Palestinians over?  I don't think so.
-       Are the BRICs willing to abandon their goals and re-embrace the dollar?  Not likely.
-       Is the U.S. going to end the Russian sanctions, and reverse the economic damage they're causing in Europe (and on the US)?  Don't bet on it. 

So while we should see a bit more upside on the heels of Friday’s big day, unless something really meaningful changes – it’s going to be hard to regain those 800 DOW points that we lost last week.


In terms of what to buy and what to sell:
1.    MNKD – Mannkind Pharmaceuticals is coming out with news on Monday.
2.    This news is either going to be very good for the stock (announcing partnerships with major drug companies) or very bad for the stock.
3.    If you know that a stock is going to move violently either up a lot or down – a strategy known as purchasing a ‘Strangle’ – could be employed.  A ‘Strangle’ is an option strategy where the investor holds a position in both a call and put option, at different strike prices, but with the same maturity date.  This strategy only works if you think there will be a large price movement in the near future, but are unsure of the direction of the price movement.
4.    The ‘Strangle’ involves buying an out-of-the-money call, and an out-of-the-money put option.  These options are generally less expensive because they are out-of-the-money.
5.    For example, imagine a stock currently trading at $50 a share.  To employ the strangle option strategy, a trader enters into two option positions: one call and one put option.  The call is for $55 and costs $3.00 per option, while the put is for $45 and costs $2.85 per option.  If the price of the stock stays between $45 and $55 over the life of the option the trader will lose what he paid for the options.  However, the trader will make money if the price of the stock starts to move outside of the $45 to $55 range.  If the stock price ends at $35, then the call option will expire worthless but the put options will gain more than enough value to offset the loss of the call option.
6.    For MNKD – this week’s $8 / $8.50 straddle is buyable for $1.18, and is well inside the expected move of $1.67.  Now if you already own the stock, Buying the $8 put options for $0.61, or the $7.50 put options for $0.43 are interesting ways to protect yourself on the downside – all the while maintaining your upside bias.

My current short-term holds are:
-       AAPL (Tech) – in @ $92.86 – (currently $94.61),
-       COST (Retail) – in @ $115.12 – (currently $119.16),
-       DLTR (Retail) – in @ $51.97 – (currently $55.68),
-       FEYE (Tech) – in @ $28.05 – (currently $30.44),
o   Purchased PUTS as a hedge
-       IG (Tech) – in @ $6.24 – (currently $6.28),
-       KO (Beverage) – in @ $41.17 – (currently $39.45),
o   Purchased PUTS as a hedge
-       LNG (Energy) – in @ $57.40 – (currently $70.72),
-       MNKD (Drug) – in @ $6.35 – (currently $8.13),
o   Purchased PUTS as a hedge
-       NUGT (Gold) – in @ $41.10 – (currently $46.66),
-       TLT (Bonds) – in @ 112.32 – (currently $115.52),
-       TSRA (Tech) – in @ $27.26 – (currently ($28.28),
-       SLV (Silver) – in @ $20.17 – (currently $19.19)
-       SIL (Silver) – in at 24.51 - (currently 14.18), and
-       GLD (ETF for Gold) – in at 158.28, (currently 126.19)

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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