This Week in Barrons – 9-21-2014:
Dear Ms. Yellen:
Thank you Ms. Yellen for what you (and your predecessor ‘The Ben Bernake’) have done to interest rates over the past 5 years. I don’t have much savings, so reducing a bank’s CD rates to below inflation really doesn’t bother me all that much. And now that the economy is doing fine, I understand you think it’s time to raise the interest rates back up to normal levels. That all makes sense to me. A quick question: When you raise interest rates in the next 6 months – where do I find the additional dollars to pay my higher mortgage payment? I mean, housing starts were down over 14% last month, and there are 53% more vacant homes for sale right now, than in 2010. It’s pretty clear to me that the real estate community is having trouble selling houses with your incredibly low interest rates - How are they going to sell houses when the interest rates rise? And when rates rise, can Uncle Sam afford to pay the interest payments on our national debt? When rates rise, will I be able to afford to buy a new car, truck and toys for my kids? So, in other words, with wages stagnant – is there a reason why you’re turning off ‘life support’ to our economy?
Least I forget I also wanted to thank you (Ms. Yellen) for what you’ve done to the stock market and my 401k. However, many people don’t realize that 47% of the NASDAQ and 40% of the Russell (small-cap) stocks are down 20% in the past 12 months. That's a lot of stocks in virtual ‘bear market’ territory. But I’m worried about my 401K, you see:
- When you ended QE1 – the market fell.
- When you ended QE2 – the market fell.
- When you ended QE Twist – the market fell.
Now that you’ve confirmed ending QE3 in October, what should I do about the impending market crash? Should I take my money out of the market now?
Lastly, I also wanted to thank you (Ms. Yellen) for the strength in the U.S. dollar. This dollar strength allows me to think better about the Democratic candidates as a strong dollar has kept prices low on gasoline, food, that new iPhone, and even a couple extra beers while watching Monday Night Football. But the Consumer Price Index FELL for the first time in over a year last week – should I be worried about deflation? And having a strong dollar goes right against what you’re trying to do with QE and zero rates – yes? I mean even China (this week) announced a $500B QE program for their troubled banks. So, when the mid-term elections are over, how quickly do you think you will return to the ‘printing press’ and the devaluation, currency wars against Japan and Europe again? Should I buy things now before the prices go up?
In Germany, their 2-year bond is paying a negative rate of return. So if you took your money and purchased a German, government sponsored, 2-year note – you are going to PAY THEM to hold your money. As bizarre as this sounds, when I look around the world I’m seeing savings rates that are at 200 year lows. France’s 10-year yields have dropped to their lowest levels in 250 years – 1.52%. The good and bad news is, it’s not just Ms. Yellen pushing the boundaries of insanity – it’s the world.
In the past 36 months, we have not had a typical market correction of 10%. This length of time between corrections has only occurred 3 times in the history of our market. This week we received the ‘wink and nod’ from Ms. Yellen about interest rates – so we made all-time highs. We launched the life-changing iPhone6 – so we made new all-time highs. And we had the largest IPO in history, Alibaba – so we made new all-time highs. But:
- Friday was a triple witching options expiration day. That’s an event that occurs 4 times a year, when the contracts for stock index futures, stock index options, and stock options all expire on the same day. It often leads to a choppy market as major players square off their positions and institute new ones. The week after ‘triple witching’ has been down/red 17 out of the past 22 weeks.
- The market also put in a Hindenburg Omen (and confirmation) this week. This omen is a combination of technical data points that tend to mark a market peak. It’s telling us that there is about a 30% chance of a market crash over the next 4 months.
- Ms. Yellen confirmed that QE would end in October.
- The IWM is the ETF (Exchange Traded Fund) for the Russell 2000. The Russell 2000 is comprised of the small companies in the market that often set the direction for the big companies. Well, the IWM is getting awfully close to falling below it’s 200-day moving average – which is not a bullish sign for the markets.
- The CRB index (which measures the price of commodities) is dying a ‘not too slow’ death. On Friday the index fell to a 4-year low, prompting the more intelligent to ask: If the world is in a recovery, shouldn’t it be buying more stuff and not less? Oil and gas demand are down. Copper demand is down. If no one is buying commodities, how much of a recovery can there possibly be?
- This week FedEx beat their estimates. But if you read the companies OWN press release, they say that their stock buy back added 15 cents to the bottom line. In other words if they hadn't spent billions to buy back their own stock, they would have MISSED earnings by a penny. And (by the way) you know all that FED speak about no inflation – FedEx announced an across the board price increase of 5% starting in January.
- But nothing (and I mean NOTHING) screams recovery (or lack of one) like Caterpillar. Despite all of their stock buy back programs and their share price over $100 – they have had 21 straight months of DECLINING year over year global sales.
Bottom line, it feels like we might be just days or weeks away from a really good pull back.
Reducing my portfolio over the past couple of weeks seems to have worked – and this week I’ve reduced it even further. Being fearful of a market pullback, I’m now holding significant positions in a couple of the energy stocks, and a couple cyber-security stocks. 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 Put Credit Spreads, if it’s ‘DOWN’ – I sell more Call Credit Spreads.
If the market does decide to change directions, I would strongly recommend:
- SELLING Call Credit Spreads for weekly income,
- BUYING Put Options on your favorite high-flying stocks, and/or
- BUYING ‘inverse’ ETFs.
If you’re uncomfortable with playing in the ‘Options’ market, there are ‘inverse’ ETFs that go up when the stock market goes down. For instance, if you think the S&P is going to go lower, you can buy the SH. This is a ‘one for one’ ETF, that goes one point higher for every point that the S&P goes lower. The SDS goes 2 points higher for every one point that the S&P goes down. And the SPXU goes 3 points higher for every one point that the S&P declines All of the major index's have inverse ETF's. For the DOW, consider looking at: the DOG for the 1 to 1 relationship, the DXD for the 2 to 1 relationship, and the SDOW for the 3 to 1 relationship. There are approximately 70 inverse ETFs out there for those uncomfortable investing in options.
My current short-term holds are:
- FEYE (Cyber-Sec) – in @ $28.76 – (currently $33.95),
- KO (Beverage) – in @ $41.17 – (currently $42.05),
- LNG (Energy) – in @ $57.40 – (currently $84.16), and
My Small Caps (earned 19.73% in the month of August):
- LNGLF (Energy) – in @ $3.54 – (currently $3.89),
- IG – in @ $7.27 – (currently $7.55), and
- VDSI (Cyber-Sec) – in @ $14.17 – (currently $19.13)
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.