This
Week in Barrons – 9-28-2014:
Dear Ms. Yellen:
Ms. Yellen, are you at all worried that we’re loosing the currency
devaluation race? Europe and Japan are printing
money like there is no tomorrow. Even
China stuck a $500 Billion QE toe into the shallow end of the pool. This dual blast from the Pacific and Atlantic
is sending the dollar higher. The dollar
rally is causing a little deflation, which is showing up in such things as the
reduced price of gasoline – just in time for the November mid-term elections. I was thinking, given your balance sheet now
contains over $4 Trillion in short term maturities, can’t you just keep rolling
$100’s of Billions of dollars back into the economy as these short-term
maturities come due? So I think you have
a built-in QE – yes? And I don’t think
you’ll need to PRINT any more money, unless (of course) either government deficits
increase or you wish to raise interest rates.
I’m betting you’re going to start discussing these things right after
the mid-term elections – am I right?
Ms. Yellen, due to the re-engineering and re-design of ALL of our
economic indexes: GDP (target of 5% growth), Unemployment (6%), and Inflation
(1.5%) – are these targets sheer fantasy at this point? For example, even though the 2nd quarter
estimates for GDP were raised to 4.6% - the Commerce Department itself said ALL
categories looked strong - EXCEPT Consumer Spending. That’s like saying: “You’re in great health – EXCEPT
for having Cancer.” Any high-school
sophomore knows that two-thirds of the economic activity comes from the
consumer. So if consumer spending
remains weak, how are the GDP estimates revised higher? Oh – I remember – that’s why you re-engineered
and re-designed the GDP calculation to include $100’s of Billions of (previously
not-counted) non-tangible assets – my apologies.
Ms. Yellen, does it bother you that for the first time in many decades, the
entire Board of Governors of the Federal Reserve will be completely appointed
by one President (Obama)? Imagine if Obama
were able to appoint every Justice on the Supreme Court, we would most likely
have a one-sided Supreme Court. Aren’t
you at all worried that we now have (and will continue to have during your
14-year team) a one-sided FED? In fact,
during the last FOMC meeting, the only dissenting members against your policies
were non-Obama appointees – Mr. Fisher and Mr. Plosser. With the recent resignations of Mr. Fisher
and Mr. Plosser, doesn’t it feel a little bit like: ‘marrying your sister’?
Ms. Yellen, your monetary concept is frequently referred to as ‘inflating
your way out of debt’. Under this
scenario, you’re hoping that prices will increase enough to offset our debt
obligations. I agree with the concept,
as long as it’s attached to a reasonable understanding that the debt will be
repaid. Does it bother you that
mathematically there is no hope of the U.S. ever repaying its debts?
And lastly Ms. Yellen, on the subject of interest rates – isn’t this
simply the ‘chicken and egg’ problem?
Meaning, if you want to end QE and the FED buying U.S. bonds, you will
need to find someone else to buy the bonds – yes? The only way to generate interest in our bonds
is by offering a compelling interest rate. However, if you raise the interest rate – you:
1) stall economic growth, and 2) further increase government deficit spending
because the interest on the existing U.S. debt would increase astronomically. Hence, I don’t understand how you can ever
raise rates without stalling economic growth and increasing government deficits
– but then how do you find buyers at non-competitive prices. Oh – I forgot about funneling these ‘fake
purchases’ thru Belgium – my apologies.
Ms Yellen, I’m worried that when the ‘s**t hits the fan’ (and it will),
everyone that believes in these numbers and has followed you – will act
surprised and say – “No one saw that coming!” Just like those blind ideologues did during
the housing crisis and the dot.com crisis before that. Oops – I guess that’s why history continues
to repeat itself – again, my apologies.
The Market:
This week:
-
Stock outflows continued – making it 21 out
of 22 weeks that we’ve seen an outflow from stock funds.
-
Mortgage applications fell by over 4.1% again
last month. Houses aren't selling because
millennials don't necessarily want a house, and because nobody has the money to
buy them anyway. And (to add insult to
injury) delinquent home mortgages increased 5% last month.
-
The auto industry is being fueled by subprime
loans. Lately, many subprime loans come
with a ‘start-blocker’ installed in the car.
That means if you're late on a payment, they turn the switch, and no
matter where you are, your car won't start any more – until you pay.
-
When you think manipulation, the DOW index is
composed of 30 stocks; the Russell index of 2,000 stocks. With the DOW continuing to make new highs,
while 40% of the Russell 2,000 is down over 20% this year – Which index do you
think is being manipulated?
-
Over the past 12 months, stock buy-back
programs have grown by 30% to an incredible $550 Billion. The sole purpose of a stock buy-back is to
push the stock price higher – so that corporate executives can cash-in their
stock options at inflated prices. So far
this year – less than 7,000 corporate ‘insiders’ have PURCHASED any stock in
their own companies while over 23,000 ‘insiders’ have SOLD stock in their own
companies.
-
For the first time in history, volume in WEEKLY
SPX options has eclipsed the MONTHLY volume.
This tells us that ‘trading horizons’ are continuing to shorten.
-
France and Germany are showing a noticeable
slowdown in their economies. Maybe the
European markets have a) Taken a hit because the U.S. market took a hit, b) Are
taking a hit over their lousy economic policies (Russian sanctions), and/or c) Are
using the ‘air strikes’ as a good excuse to ‘lighten-up’ on activities and positions.
-
Finally, Goldman Sachs Asset Management
predicts that Treasury 10-year yields will climb to their highest levels in
four years – as the FED ends its bond-buying program, and weighs the first
interest-rate increase since 2006. In
fact, they are suggesting that 10-year rates could rise to 4%. Honestly, if rates move from the current 2.5%
to 4% - you will see a ‘blow-up’ like no other.
Everyone has priced in debt at 2.5%, and a rise of 1.5% (a 60% increase)
would bring out a whole new swarm of ‘Lehman Brothers’ catastrophes.
Just this week a server in a restaurant recommended a stock to me. That reminded me of a story: In the 1920’s,
J.P. Morgan arrived bright ‘n early at the Stock Exchange – like he did every
morning. On this particular morning the
shoeshine boy gave Mr. Morgan a stock tip. When Mr. Morgan entered the exchange he told
all of his staff to SELL everything, and to ‘short’ the market. When they asked why, he said: “The shoeshine
boy just gave me a stock tip.” His staff
seemed baffled by his response. Mr. Morgan
then said: “If the shoeshine boy is advising and buying stocks, there is no one
left that is NOT buying; therefore, without any more buyers – it’s TIME to SELL.” What followed was the Great Depression. Welcome to October!
Tips:
If we take a look at the various markets and sectors:
-
The DAX (in Germany) is grinding lower.
-
The Euro Stock 50 (European index) is holding
up better than the DAX – but not by much.
-
The NASDAQ (NDX) had a respectable
retracement bounce on Friday – admittedly on half volume, and the battle that
is brewing is whether we can close above the trend line and re-test the highs –
OR obey the existing trend line and keep going lower. In either case, I think we obey the 4,000 to
4,100 range for this week.
-
The S&P’s (SPX) are still in a down-trend,
and unless it breaks it’s trend line to the upside – we’re going to continue to
grind lower. 1,960 is the first level of
support on a drop, and 1,940 is the lower bound. If we get a little consolidation, we could get
a bounce in here and start forming the second shoulder into the mid-term
elections.
-
The Russell (RUT) – the small-cap stock index
– is by far the weakest index. To regain
my faith in the overall economy, the Russell 2,000 (RUT) needs to find support
here, and start rallying.
-
The Financials (XLF) are somewhat ‘hanging
out’ here – neither leading or lagging the market.
- The Energy
Sector (XLE) has been decimated, but on
Friday it changed momentum and could begin to move higher this week.
- Bonds (TLT) held up nicely on Friday (despite the market rally later in
the day), and proved that this is a good hedge for the stock market.
- The VIX (VIX) is in a ‘squeeze’, and when this happens stocks often sell
off significantly. The VIX is
still in the 15-range, and I suspect it will stay in here as we consolidate this
week.
As far as
the overall market, there are a lot of variables coming on the
horizon. Next week we will be watching for more market reaction from
this week’s roller coaster, and from the Non-Farm Payrolls Labor Report that is
due out on Friday. I think that we will continue to see the tug of
war between the bulls and the bears with (at least early in the week) the bears
winning as we grind lower in ‘sell-off’ mode.
My current
list of potential candidates this week is starting to grow again. On the
radar are the indexes: RUT, SPX, NDX, and the stocks: FB, GILD, IG, RARE, and
INSY are my longs, with NFLX, VMW and TSLA being my top ‘shorting’
candidates. I continue to sell 1+
standard deviation PCS’s (Put Credit Spreads) and CCS’s (Call Credit Spreads)
on the NDX, SPX and RUT – because selling those are somewhat agnostic to market
direction. If the weekly market
direction is ‘UP’ – I sell more Call Credit Spreads, if it’s ‘DOWN’ – I sell
more Put Credit Spreads.
My
current short-term holds are:
-
FEYE (Cyber-Sec) – in @ $28.76 – (currently
$31.98),
-
KO (Beverage) – in @ $41.17 – (currently $42.20),
-
LNG (Energy) – in @ $57.40 – (currently $80.14),
and
My Small
Caps (earned 19.73% in the month of August):
-
LNGLF (Energy) – in @ $3.54 – (currently $3.68),
-
IG – in @ $7.27 – (currently $9.23),
-
VDSI (Cyber-Sec) – in @ $14.17 – (currently
$18.90), and
-
INSY – in @ $35.14 – (currently $38.16).
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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