RF's Financial News

RF's Financial News

Sunday, August 17, 2014

This Week in Barrons - 8-17-2014

This Week in Barrons – 8-17-2014

Due Diligence:

Ever since the 1920's, the practice of ‘due diligence’ has been the mantra of the financial community.  To avoid getting caught up in the crazes, or the lies – smart investors pour over financial statements in order to discover elements such as fake companies and ponzi schemes.  This fundamental analysis was the most important term in investing for the next 85 years.

Since ‘due diligence’ takes time, effort and knowledge, the cottage industry of ‘financial analysts’ was born.  Financial analysts are paid to look deep into a company, confirming their true sales, their true assets versus liabilities, the market trends and then (based on those findings) place a rating on the company.  The feeling being that if sales were growing and revenues were exceeding expenses, it stood to reason that the company would become more profitable over time – and hopefully share that good fortune with the shareholders.  Therefore, people owning the company's stock would likely see a dividend, and (as the company became more profitable) its share price would rise.  It just made sense.

Unfortunately, one of the saddest things that I've had to tell people over the past 10 years is that when it comes to stocks, I don't care about: (a) the company, (b) what it makes, (c) their earnings, (d) their new CEO, or virtually anything other than the market technicals.  Why?  Because the fundamentals have become virtually worthless.  Corporate numbers are so tweaked and distorted lately, that they bear no resemblance to reality.  And how can you use fundamentals and ‘due diligence’ to judge a company, when the numbers you're using to determine its value are corrupt?

My favorite example of worthless ‘due diligence’ is FASB’s (Financial Accounting and Standards Board) decision to let banks mark their assets to ‘Model’ rather than to ‘Market’.  Can you imagine?  That's like me telling you that your house (according to my computer model) is worth $500,000 when (in fact) nothing has sold in your neighborhood in the past 3 years over $100,000.  Yet if I was a bank - I could list it as a $500,000 dollar asset on my books – because it’s value is based upon my computer ‘Model’ not any ‘Market’ relevance.  I can’t even imagine the amount of over-priced assets out there on bankers’ books.  

On the stock side, my favorite ‘due diligence’ example is CYNK Technology Corp.  CYNK is a social media development company that recently had a market capitalization in excess of $1 billion.  CYNK was founded in 2008 but has never commenced operations, only had one employee, no website, no revenue, no product and no assets.  This year the stock has traded for 10 cents (or less) through June 16, after which it began a ride up to a closing price of $13.90 on July 10.  We’re not talking about the tech craze of the 90's here – this was just a month ago.  But that same greed, hype, made-up figures, lies and manipulations allowed CYNK to rise just like: (a) the 1920’s run up and crash, (b) the 1990's run up and crash, and (c) the 2007 run up and crash.

Speaking of ‘due diligence’, does this sound like a healthy global economy?  Last week:
-       Germany and France's GDPs fell,
-       The German 10-year bond fell below 1% for the first time in HISTORY,
-       Wal-Mart warned for the balance of the year – blaming Obama-care,
-       Italy, Romania and Cyprus are in recession,
-       The Belgium, Czech, German, Latvian, Hungarian, and Polish stock markets are all down considerably year to date, and
-       The Euro-Zone's three largest economies (which account for two-thirds of the $12.8 Trillion dollar GDP) posted 0% growth.  

Now, how exactly does that news translate into a bullish signal for stocks?  If you can't trust the fundamentals to make your investing decisions, what can you use?  I’ll say: (a) use your own common sense, (b) your ability to connect the dots, and (c) a stock’s technical patterns (given computer trading makes up over 70% of the current trading volume on Wall Street).  Find the right chart patterns, try to be in the right sectors at the right time, and you'll do fine.

The point of all this is simple: fundamentals used to be a good way to invest for the long term, but those days are long gone.  Honestly, there isn't a sole alive that really believes our vaunted Federal Reserve when they tell us that inflation is running below 2%.  Yet, the entire credit market uses their numbers as the basis for swaps, bond rates, and social security benefits.  Just know that the closer we get to the mid-term elections the more absurd these numbers (and lack of ‘due diligence’) is going to become.  Welcome to ‘fantasy football’ season – it’s right around the corner.

The Market...

For a minute on Friday (after listening to the news flow out of Russia and the Ukraine) I thought I was living in the Matrix.  The market was up by 65 points, and at 11am it turned on a dime and went to being down 80.  The news that was hitting the wires was a statement out of the Ukraine that said a Russian convoy of arms had tried crossing into the Ukraine, and the Ukrainian military blew it up.   This naturally led to a lot of speculation about what Russia might do in retaliation.  
Then the strangest thing happened.  The Russians put out a statement saying that they did NOT have an arms convoy crossing the border, and that the Ukrainian statement was a fantasy.

Instantly, the world tried to do their ‘due diligence’ – looking for photos of the wrecked convoy, but there were none to be found.  Wait a minute.  The Ukrainians – the good guys (yes) - said that they blew up a convoy of weapons and there are NO pictures?  IF the Russians are sending convoys of weapons to the rebels and the Ukrainians blew them up, wouldn’t we have a true escalation-taking place?  But IF the Ukrainians simply made up this story to further the pressure against the Russians, then that (in and of itself) is an escalation.  In either event, that entire situation isn't good.

But if nothing goes ‘bump in the night’ over the weekend, I think we see the market shake off the jitters and push us higher, in a nervous, herky-jerky fashion – fully knowing that weird news could hit at virtually any time.  This is a wacko-market where buying smaller positions and taking your profits quickly is the way to play.  Don't swing for the fences (just yet) in this market.


I continue to follow my plan – looking for ‘income plays’ (spread trades) and monitoring the positions closely.   When I say ‘spread trades’ I mean:
-       IF a stock is moving up or sideways, then I ‘SELL’ a Put-Credit Spread, 1 standard deviation out of the money, and
-       IF a stock is moving down or sideways, then I ‘SELL’ a Call-Credit Spread, 1 standard deviation out of the money.

My current list of potential spread candidates include: AZO, CBRL, HOG, BA, CMG, UTX, SLB, PII, URI, BAX, KRE, BEAV, OEX, CBI, TWX, SHPG and SPY.  In terms of directional trades:
-       Buying TLT (the Bond ETF) on pullbacks to the 8-day and 21-day moving averages, and selling at extensions has been working nicely for the past 11 months, and
-       Buying stocks that have a mind of their own (despite what the market is doing) such as TSLA, FFIV, AAPL, NFLX and CMG continues to work in weekly increments.

Examples of 2 spread trades that we did this week are:
-       EWZ – the Brazilian ETF.  Days ago, Brazilian Presidential candidate - Eduardo Campos was killed in a plane crash.  This sent the entire Brazilian market lower, and sent EWZ down by as much as 2.6%.  It is now holding support at its 100-day moving average.  The volumes are elevated, and I therefore sold an Iron Condor for September expiration.  I used 2-point wide strikes to limit my risk.  I SOLD the SEPT – 45/ + 43 PUT’s & the - 52 / +54 CALL’s for $0.45 per share.
-       IWM – the small cap ETF.  I think that there is a good set-up here for September.  There are elevated volumes, and nice premiums to be sold.  Again, I used 2-point wide strikes to limit my risk.  I SOLD the SEPT – 106 / + 104 PUT’s & the - 118 / +120 CALL’s for $0.50 per share. 

My current short-term holds are:
-       AAPL (Tech) – in @ $92.86 – (currently $97.98),
-       DLTR (Retail) – in @ $51.97 – (currently $55.60),
-       KO (Beverage) – in @ $41.17 – (currently $40.88),
-       LNG (Energy) – in @ $57.40 – (currently $73.23),
-       NUGT (Gold) – in @ $41.10 – (currently $46.94),
-       TLT (Bonds) – in @ 112.32 – (currently $117.71),
-       SLV (Silver) – in @ $20.17 – (currently $18.86)
-       SIL (Silver) – in at 24.51 - (currently 14.06), and
-       GLD (ETF for Gold) – in at 158.28, (currently 125.48)

Diving back into some Small Caps:
-       FET (Oil) – in @ $25.14 – (currently $32.36),
-       GTAT (Tech) – in @ $17.84 – (currently $17.36),
-       IDTI (Tech) – in @ $15.08 – (currently $15.22),
-       IG (Tech) – in @ $6.24 – (currently $6.12),
-       LEJU (Tech) – in @ $13.07 – (currently $13.57),
-       PEIX (Oil) – in @ $19.34 – (currently $20.38),
-       RFMD (Tech) – in @ $11.05 – (currently $11.54),
-       TSRA (Tech) – in @ $28.05 – (currently $28.73),
-       VDSI (Tech) – in @ $14.17 – (currently $14.23), and
-       VTNR (Oil) – in @ $7.87 – (currently $7.86)

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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