This Week in Barrons – 9-7-2014
“We can’t trust this number…” Mark Zandi (Moody’s Chief Economist) and Steve Liesman (CNBC economics reporter)
Last Friday, virtually every economist was predicting that our economy would create over 200,000 jobs for the 8th month in a row. Unfortunately for them, the number came in at 142,000 jobs created in the month of August. Both Mr. Liesman and Mr. Zandi (almost in unison) said: “I don’t believe this number! If you believe this number, you believe pigs fly! We can’t trust this number!” Honestly, Mr. Liesman and Mr. Zandi – is this the FIRST time that you can’t believe the numbers that are coming out of our government? Allow me to review a couple other numbers – which potentially you won’t like:
- I trust the 12% ‘real unemployment rate’ (U6 – that was used for many years) – rather than the 6.1% (U3 rate) that the media is told. FYI: 31% of the unemployed have been without work for over 6 months, and the labor participation rate reached it’s lowest level since 1978 – 62.8%.
- I trust that the typical family in 2014 makes $200 more a year, than they did in 1989.
- I trust that the U.S. is no longer leading the world in consumption. China and India currently out-consume us in computers, cars, and smart phones. It’s only a matter of time before they out consume us in every single category.
- I trust that the BRIC nations (Brazil, Russia, India and China) have wage growth of over 10% per annum, with the U.S. being basically stagnant.
- I trust that credit card growth in China is over 20% per annum, with the U.S. being flat.
- I trust that on Thursday of this week, the European Central Bank (ECB) cut it’s deposit interest rates another 10 points. It will now COST you 0.2% to keep your money in a ECB bank. That's right, you have to PAY to put money in any EBC regulated bank.
- I trust that Mr. Draghi announced that the ECB would indeed begin buying asset backed securities (mortgages). So despite the European Union's charter making it illegal for the EU to do ‘QE’, they're going to go ahead and do it anyway by saying that it really isn't QE.
In this day and age, it seems to be all about the flow of ‘free money’ and forcing people to buy stocks. But maybe it’s not just PEOPLE buying stocks. For years I’ve been saying that the world’s Central Banks are active participants in the markets. On many occasions I’ve watched our markets be on the verge of ‘rolling over’ when – like magic – the ‘plunge patrol team’ would come in and save the day with a Billion dollar futures order. Several months ago it was uncovered that Central Banks had purchased an incredible $29 Trillion worth of stocks and equity based assets. Now, for the first time, Nanex’s Eric Hunsander has discovered that not only do the Central Banks actively play in the stock market, but they also play in virtually every area of trading from commodities to options to currencies. In fact, the CME has a Central Bank Incentive Program – giving Central Banks price breaks on trading.
BINGO – the world’s Central Bankers are actually market participants, and there’s an actual incentive program for Central bankers to be even more involved. But unfortunately this simply opens the ultimate can of worms to: What about the laws of supply and demand? If you would like to bid on a stock or a commodity, what happens when the person on the other side of the trade is a Central Bank with unlimited, deep pockets? After all, Central Banks are institutions that manage currency, the money supply, interest rates, and the commercial banking system. Central Banks (the FED in the U.S.) also possess a monopoly to PRINT a nation’s currency.
Don’t you think it’s unfair at best (illegal at worst) that you could be trading opposite an entity that can withstand infinite losses and can PRINT their way out of virtually any trading position? This destroys any connection whatsoever that the markets may have had to reality. How is a supply and demand balanced market even possible if on one side resides a Central Bank (with an infinite supply of money) for whom the entire notion of ‘losing money’ becomes completely irrelevant?
I have said for about a decade that I no longer care about fundamentals. Stocks do NOT go up any more because of sound fundamentals. That boat has sailed. The only thing that matters is what the market ‘elites’ want the stocks, commodities, and currency markets to do. Stocks go up (and often quickly down) because the Central Banks drive them there. For the past few years, the ‘market elites’ wanted the stock market higher and now we have proof – NUMBERS we can TRUST. So Mr. Zandi and Mr. Liesman please do NOT talk to me about ‘numbers you can trust’, but rather find me a trustworthy ‘market’.
The market started this holiday shortened week a bit sluggish, and with news of another terrorist beheading of a journalist. The ISIS group does have the power to move markets; because when they do these things, we know there's going to be a retaliation and escalation of ‘boots on the ground’. We continued the week drifting sideways and down. In fact, the S&P put in its first 3-day losing streak in many weeks. Just about the time I thought everyone was giving up – we got a horrible jobs report on Friday and news of a so-called cease fire in the Ukraine – and ‘BOOM’ up we went.
So, are we in for another leg higher? Given the data, I would have to say no. After all, the U.S. Labor Participation rate dropped to it’s lowest level since 1978. This stat alone shows how blatantly the economy and the stock market have NOTHING in common. With the lowest labor participation rate in 35 years, the S&P’s made a new all-time high this week. This is NOT normal.
I understand that:
- Our FED is a major buyer of stocks.
- Our FED gets favorable pricing and ‘discounted rates’ in order to incentivize them to buy even more.
- The percentage of analysts bullish on the market is hovering near record highs, while ‘bears’ are almost non-existent.
- The ‘set it and forget it’ mentality tells all of us that this upward movement can’t stop. I assure you it can, and it will. I just wish I could tell you when.
The hedge fund industry is seriously lagging the market. Coming into September, the entire industry is many percentage points below the gains of the S&P. Why is that? Because a true ‘hedge’ fund, takes positions that offset some value of risk. Since the FED has created a market that only goes up, not being 100% long all the time means that you're missing the boat – and underperforming the S&P.
Will all of the hedge funds then throw caution to the wind and go ‘all in’ and be ‘extra long’ for the remainder of the year? If they do, that would push the market higher, even if the retail customer does nothing. However, it is times like these (with the momentum monkey fully in charge) when the market often tosses everyone a massive curve ball and drops like a rock. With these daily, low trading volumes – producing a serious lack of liquidity, if everyone tries to bail out at the same time it will feed on itself quickly.
I have heard nothing out of the FED that would lead me to believe that Friday’s lousy jobs number will stop them from ending QE in October. The markets appear to be in denial of the FED stopping a liquidity program. I think the FED will indeed stop QE, but will continue to keep rates low. I also think that after the next FED meeting, people will wake up to the idea that part of the gravy train is running off the tracks.
I’m currently leaning long, but I'm not terribly comfortable about it. If we don't see some follow through on Monday, I suggest we'll do a bit of fading again until they find some other reason to jam us back up. If we do see a strong up-move on Monday, then I'll count on the trading-bots to continue to drive us higher during the week. Therefore, a show of strength on Monday will be important to consider, so watch the levels – as it could set the tone for the week. I also suspect this week to be a bit more volatile and have more volume as everyone returns to his or her trading desks. The returning traders will be making decisions for September, a month not usually generous to stock markets.
In response to a question that I received about ‘How I trade?’, I’ve listed below some of the guidelines that I follow when trading stocks & options:
- I constantly consult a stock’s chart in order to find the points of entry and exit with the highest probability of success.
- I believe that you CAN time the market. You can’t buy the EXACT low and sell the EXACT high, but there are good and bad entry points.
- Learn to cut your losses quickly. “Re-entry is just a commission away.”
- Learn NOT to sell too soon – but rather hold for the bigger move.
- Do NOT believe that diversifying your portfolio will protect you.
- Do NOT believe that safety lies in covered calls or dividend paying stocks.
- Do NOT buy or sell based upon emotion.
- Do NOT average DOWN your losers.
- Do NOT trade against the market trend. “The trend is your friend until it ends.”
When picking Small Cap stocks – I look for:
- Companies with a market cap between $1B and $10B,
- Stocks priced under $60, but not a deal killer if they aren’t,
- Stocks that are at or near 52 week highs,
- Companies that are less than 5 years old – they are generally in a faster growth phase than more well established companies, and
- Companies that have high short interest are a bonus to find.
My energy (oil) stocks and selling 1+ standard deviation PCS’s (Put Credit Spreads) and CCS’s (Call Credit Spreads) on the NDX and SPX became a little more ‘exciting’ this week with the surprise, ECB rate cut. With the ECB rate cut, the U.S. dollar rose – which immediately reduced the price of commodities. One of my favorite stocks – LNG – rebounded nicely on Friday, but some other oil stocks will take into September to rebound.
In terms of directional trades:
- BOUGHT TLT (the Bond ETF) as it reached it’s 8 and then 21 day moving average – October $114 and $121 Calls,
- SOLD NDX & SPX – PCS’s (Put Credit Spreads) and CCS’s (Call Credit Spreads) – 2 SD (standard deviations) out & will buy more during the week for weekly expiration,
- SOLD EWZ – PCS’s and CCS’s / 1SD out / Sept. monthly expiration,
- SOLD AZO – $540 - 550 - 560 Butterfly / Sept. monthly expiration,
- SOLD DVN – PCS’s / 1 SD out / Sept. monthly expiration,
- SOLD IBB – CCS’s / 1 SD out / Sept. monthly expiration,
- BOUGHT MA – January, $86 Calls, and SELL PCS’s (short term),
- SOLD VIPS – PCS’s (Put Credit Spreads) and BOUGHT Calls to take advantage of a one-day sell-off in the stock,
- SOLD RUT and IWM – PCS’s (Put Credit Spreads) – Sept. monthly expiration
My current short-term holds are:
- FEYE (Cyber-Sec) – in @ $28.76 – (currently $31.72),
- KO (Beverage) – in @ $41.17 – (currently $41.84),
- LNG (Energy) – in @ $57.40 – (currently $83.35),
- NUGT (Gold) – in @ $41.10 – (currently $37.64),
- TLT (Bonds) – in @ 115.94 – (currently $115.73),
- SIL (Silver) – in at 24.51 - (currently 12.75), and
- GLD (ETF for Gold) – in at 158.28, (currently 122.06)
My Small Caps (earned 19.73% in the month of August):
- ANAC – in @ $22.52 – (currently $21.92),
- ANV (Miner) – in @ $3.78 – (currently $3.62),
- FCEL (Energy) – in @ $2.52 – (currently $2.60),
- FET (Oil) – in @ $25.14 – (currently $32.83),
- GTAT (Tech) – in @ $17.84 – (currently $16.99),
- IDTI (Tech) – in @ $15.08 – (currently $16.94),
- IG (Tech) – in @ $6.24 – (currently $6.86),
- LEJU (Tech) – in @ $13.07 – (currently $17.09),
- LNGLF (Energy) – in @ $3.54 – (currently $3.69),
- PEIX (Oil) – in @ $19.34 – (currently $22.83),
- RFMD (Tech) – in @ $11.05 – (currently $12.31),
- TSRA (Tech) – in @ $28.05 – (currently $29.68),
- VDSI (Tech) – in @ $14.17 – (currently $16.40), and
- VTNR (Oil) – in @ $7.87 – (currently $8.86)
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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