This Week in Barrons – 8-31-2014
Are we living through an Accident, a Great Loss, or a Tragedy?
I am reminded of the old joke: What is the difference between an accident, a great loss and a tragedy?
President Obama was visiting a primary school’s 4th grade class – when the teacher asked the President if he would like to lead the discussion on the word 'tragedy.' The President acknowledged and asked the class for an example of a 'tragedy'.
- One little boy stood up and offered: "If my best friend, who lives on a farm, is playing in the field and a tractor runs him over and kills him – that would be a tragedy."
- "No," said Obama, "that would be an accident."
- A little girl offered: "If a school bus carrying 50 children drove off a cliff, killing everyone, that would be a tragedy."
- "I'm afraid not," explained Obama. "That's what we would call a great loss.”
- From the back of the room, little Johnny (in a quiet voice) said: “If the plane carrying you and Mrs. Obama was struck by a 'friendly fire' missile and blown to smithereens that would be a tragedy."
- "Fantastic!" exclaimed Obama. "That's right. And can you tell me why that would be a tragedy?"
- "Well," said Johnny, "It has to be a tragedy, because it sure wouldn't be a great loss, and you can bet your sweet ___ it wouldn't be an accident!"
Currently, a very dangerous game of global chess is being played, in which most of us are simply pawns. 100 years ago, a similar game was labeled a ‘tragedy’ – WWI. WWI started as an ‘accident’ resulting from the ruling elite bumping heads, and caused ‘great loss’. However, 2014 is vastly different from the world of 1914. Wars today aren't confined to well-defined battlefields. Today, there is no place to hide, as every major global city is ‘dialed-in’. When adding together the 20 leading nations – and their individual ruling bodies – about 20,000 ‘likeminded’ people (out of a total 7 Billion) have the ability to cause a ‘tragedy’. 20,000 ‘likeminded’ people are the size of a large church congregation, or the inmate population of a medium-sized prison. And that is why this chess match is so intriguing.
Often the first casualty of war is truth – as scientists have recently proven – ‘blind optimism’ can completely obscure the truth and logic sides of the brain. For example: Since 2005 (in the U.S.) – middle class household wealth has decreased by 35%. According to the Census Bureau in the years from 2005 to 2001, the median household's net worth FELL from $106,591 to $68,839. If however, you cut the middle class into 5 segments, the segment next to the bottom went from being worth about $16K to about $7K, and the lowest segment went from being up less than $1,000 in 2005, to being in DEBT for over $6,000 in 2011. The U.S. has gone from being stable to being wickedly in debt.
So the question becomes – What would trigger an ‘Event’? If the U.S. loses its role as the supreme global reserve, does that mean that the Government would reduce handouts? Yes and No. It probably means that what they continue to give out will be more closely monitored. In other words you probably won't get checks and EBT cards automatically recharged. You'll probably have to jump through hoops to get your benefits, and those same benefits will be reduced in size.
My best advice is to ‘live below your means’. No one knows how lunatic our system is going to get, but we can see hints, and it's not that good. I'd rather see you live comfortably, rather than get caught in a spiral debt trap. Continue to dive behind the headlines. Remember, consumer confidence rose to 92.4 - right before the Great Recession officially began. Maybe it’s an ‘accident’ that people won’t be able to open their wallets in the face of stagnant wage growth. Maybe it’s just a ‘great loss’ of full-time employment in favor of part-time employment. But it’s dangerous to never pay off your credit cards and school loans with real unemployment raging in the 12%+ range. The headline data may make us all feel good; the ‘tragedy’ surfaces when you look behind the curtain.
This past week we received some good news:
- 2nd Quarter GDP was revised higher to 4.2%, but 1.66 percent of it was due to inventory loading (a one-time event). Therefore, the real GDP for Q2 was 2.8%. Combine that with the negative Q1 GDP and the U.S. officially had 0% growth for the 1st 6 months of 2014.
- The durable goods orders came in nicely, but if you subtract out Boeing’s aircraft orders, the core was down -0.8%.
- True inflation is approximately 9.8%, and true unemployment is approximately 13%.
Presumably these calculations were not ‘accidents’, but could cause a ‘great loss’ of confidence in the leadership of the U.S. Especially since our own Congressional Budget Office lowered their full 2014 GDP estimate from 3.1% to 1.5%. Wal-Mart and Target confirmed the negative consumer direction by reporting contracting same-store sales, contracting top-line revenue, and lowering their full-year earnings estimates.
But honestly – where in the world are sales coming from? Unfortunately, the emerging markets are the only strength in global growth. In emerging markets, consumers are seeing real wages increase, increased access to disposable income, and are increasing their spending. Also, luxury buying is increasing worldwide. President Obama is truly a friend to the top 1% as data shows that our FED policies had a massive impact on our equity markets – which directly translates into the pocketbooks of the top 1%.
In my view, these markets are becoming dangerous. More and more people are beginning to buy into the lie that the market only goes up. They made that mistake in the late 90's, and were taught a horrible lesson when the NASDAQ fell by 60% in the early 2000's. They made that mistake in housing during the insane housing bubble of 2002 - 2006. While watching the market go to nosebleed levels, and taking the ride along with it – is a lot of fun, I just have this ugly feeling in my stomach that once again a lot of people are going to get fleeced.
I know a massive correction is going to hit. I just don't know when. They have pushed this market further than I remotely thought possible. When you have markets making all-time highs on RECORD low volume – it doesn't speak to me of rabid enthusiasm.
So, I go with the flow. I am trading using mostly Put Credit Spreads and Call Credit Spreads as of late. I’m taking profits a little bit sooner. And I’m seeing my ‘Small Cap’ market picks take off – up over 20% in the month of August alone. Just understand that this is not an organically driven, fundamentally sound market – that cannot go up forever. This market is out of enthusiasm, and feels out of gas.
In historical terms, September is the cruelest month. It is actually September (not October) that has caused the most amount of market damage. So is it this September when they rush for the exits, and get out ahead of the official end of QE? It’s a possibility. But if it doesn’t end in September, the next exit opportunity would be in late November – after the mid-term elections.
So we’re (once again) walking on eggshells, waiting for the day when a small 2% dip does NOT get bought and turns into an 8% dip. And the 8% dip turns into 15%, and then snowballs to 25%. An insane FED will not break Mother Nature and the laws of economics. Laws can be postponed, but not abandoned.
Selling 1+ standard deviation PCS’s (Put Credit Spreads) and CCS’s (Call Credit Spreads) on the NDX and SPX co-operated very nicely with us these past two weeks – pushing our monthly returns to over 20% for the month of August.
The market has always climbed the ‘wall of worry” and I think it is doing so now. The elements that concern me are global, on the geopolitical side, and could flare up at any time. As long as things remain calm we can continue higher, but we need to be on guard for a quick selloff. Our markets are extremely extended, and with any scare will easily pullback.
My current list of potential candidates is lighter again this week. Some names I am looking at are UTX, LMT, BA, CMG, SLB, COP, UNH, AET, PII, URI, BAX, possibly SAM, as well as OEX, SPY and SPXPM. I am still looking at some of our old trades BEAV, CBI, and still considering SHPG but concerned about the light volume. As you know these are just candidates of interest and the trade set up has to be right to take the trade. In terms of directional trades:
- SOLD TLT (the Bond ETF) as it reached it’s 1.272 extension and will gladly buy it back when it pulls back to it’s 8 and 21 day EMA’s,
- SELL DVN – PCS’s (Put Credit Spreads) – as energy is on a tear,
- SELL IBB – CCS’s (Call Credit Spreads) – 1 SD (standard deviation) out as they are extended,
- BUY MA – Longer dated Calls, and SELL PCS’s (short term),
- SELL NDX & SPX – PCS (Put Credit Spreads) and CCS (Call Credit Spreads) – 2 SD (standard deviations) out & buy more during the week,
- SELL TSLA – PCS’s (Put Credit Spreads),
- SELL VIPS – PCS’s (Put Credit Spreads), and
- SELL RUT and IWM – PCS’s (Put Credit Spreads).
My current short-term holds are:
- AAPL (Tech) – in @ $92.86 – (currently $102.51),
o Will exit mid-to end this week
- FEYE (Cyber-Sec) – in @ $28.76 – (currently $31.14),
- KO (Beverage) – in @ $41.17 – (currently $41.72),
- LNG (Energy) – in @ $57.40 – (currently $80.26),
- NUGT (Gold) – in @ $41.10 – (currently $45.74),
- TLT (Bonds) – in @ 112.32 – (currently $119+),
o Exited position on Friday – will buy in @ 8 and 21 EMA
- SIL (Silver) – in at 24.51 - (currently 13.44), and
- GLD (ETF for Gold) – in at 158.28, (currently 123.86)
My Small Caps (earned 19.73% in the month of August):
- ANAC – in @ $22.52 – (currently $23.29),
- ANV (Miner) – in @ $3.78 – (currently $3.82),
- FET (Oil) – in @ $25.14 – (currently $34.04),
- GTAT (Tech) – in @ $17.84 – (currently $17.81),
- IDTI (Tech) – in @ $15.08 – (currently $16.45),
- IG (Tech) – in @ $6.24 – (currently $6.89),
- LEJU (Tech) – in @ $13.07 – (currently $16.35),
- PEIX (Oil) – in @ $19.34 – (currently $23.11),
- RFMD (Tech) – in @ $11.05 – (currently $12.47),
- TSRA (Tech) – in @ $28.05 – (currently $29.57),
- UGAZ (Nat Gas) – in @ $15.40 – (currently $16.69),
- VDSI (Tech) – in @ $14.17 – (currently $14.77), and
- VTNR (Oil) – in @ $7.87 – (currently $9.33)
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.