This Week in Barrons – 10-26-2014:
Politicians – they Walk Among us – and they Breed!
Maybe it’s because of Halloween Week, but politicians are really starting to scare me. Last week President Obama (in a campaign speech) said: “By almost every measure we are better off than the day I took office". At first I thought it was his attempt at humor, until I realized he believed what he said. Factually President Obama – from the time you took office until now:
- Individual savings rates have fallen by 17%, from 6.5% to 5.4%,
- The number of food stamp recipients has increased by 46%, from 31.9 M to 46.5 M,
- The number of part time workers has increased by 12%, from 25M to 28M,
- The median income of a U.S. worker has fallen by 3.3%, from $55,871 to $53.978 (not counting inflation),
- The number of people living in poverty has increased by 26% to 48M (an all-time high),
- The majority (60%) of the jobs lost since 2008 have been 'high paying' jobs (over $18/hr.), while the majority (58%) of the jobs created since 2008 have been 'low paying' jobs (less than $12/hr.),
- AND with QE3 creating 1M jobs, but costing the taxpayers $1T – that’s a cost of $1M PER JOB created! That’s an incredible statistic. If the average job created produced wages plus benefits of $16 per hour ($33,000 per year) – where did the other 96% of the $1M per job go? Does it mean that the remaining $967,000 per job ($1M per job minus the $33,000 worker’s wages) went into the pockets of banksters – who (in turn) invested it into the stock market?
Now, we can only blame ourselves for electing the ‘Walking Dead.’ In fact, JA sent me some sample Congressional interactions that (I’m ashamed to say) made me laugh at their level of incompetence:
- Bernie Sanders (a senior Vermont Congressman) recently complained about his trip to Orlando, Florida – because his room lacked an ‘ocean view’. When he was told that Orlando was in the middle of the state he exclaimed: “Don't lie to me! I looked it up on the map, and Florida is a very THIN state!"
- Lindsay Ross (an aid to John Kerry) inquired: “Would it be less expensive when going to Hawaii - to fly into California and then take the train to Hawaii?”
- Bobby Bright (a freshman Congressman from Alabama) wondered how to find his plane. “I know that the flight number is #823, but none of the planes seemed to have the flight numbers painted on them.”
- And then there was Mary Landrieu (a Senator from Louisiana), who was told that in order to fly to China she needed both a passport and a tourist visa. Ms. Landrieu was abrupt in her response: “I do NOT need a visa because the last four times I visited China – every shop I visited accepted American Express.”
When the President speaks of income inequality, someone needs to do the math for him on the above numbers. It appears that for every working-class dollar created, we are paying $29.3 in crony capitalism to all of his capitalist-investor-banker friends. History shows us that this pace is unsustainable without a correction of dramatic proportions. I urge you to make your voices heard – the first week of November.
In the short term, there is a pattern of market manipulation developing, and it’s all being accomplished by jawboning. Early last week it was FED heads Williams and Bullard hinting at QE4, then the ECB's Coeure talked of going on an ‘ECB buying spree’, then China talking about a $30 billion targeted stimulus, and finally the Japanese finance minister hinting at a 25% stock rebalancing in their government pension fund. The amazing part is that the jawboning is working. Market volatility is at ‘un-heard-of’ levels, with wild mood-swings of a couple hundred points per day.
But let’s take a step back. One thought is that next week (when the FOMC ends the QE program) ‘air’ could start to leak out of this market. The elections are on November 4th, so any of the ‘propping up’ that may have been done will be over by then. Combine this with the incredible earnings misses from some large multinationals (IBM, Coca-Cola and McDonalds), and the outright ‘doctoring’ of earnings due to stock buyback programs (Apple buying back $45B worth of it’s own stock) – and you have a confused investor favoring the market’s downside direction.
On the other hand, we've had the first 10% correction in over 3 years, and many feel that this was as deep a plunge as we're going to see. We also are coming into the months of November and December – that are typically good months for the market. In fact, November is notorious for being the month where companies do the bulk of their buy back action. And there are a ton of hedge funds that are woefully behind the market – that will try and ‘save face’ by piling-in and ‘making’ the market go higher as they ride along.
The strong U.S. dollar (that has delivered us lower oil prices) is weakening U.S. exports and hurting our corporation’s top-line revenue abilities. Due to dollar fluctuations, tax inequalities and other reasons, multinational corporations continue to migrate overseas – where the bulk of consumers are located and where consumer income is growing. The key overseas markets are Brazil, Russia, India and China (BRIC’s) – along with the emerging markets.
So there are reasons to think that this market will fall, and reasons to think that it will rise. However, without more FED injections of some kind, this market will start to ‘roll over’, and the recent increased volatility is evidence of that. But I do NOT think that this ‘roll over’ will happen between now and the end of the year. I think that we're going to be trapped between the lows of the 10% dip and the highs we have already set. I can see us running up and down inside that range until the year ends. But come the New Year, I do expect this market to begin its downtrend, and it could fall a long way.
Next week (on Tuesday and Wednesday) we have another Federal Open-Market Committee (FOMC) meeting. I believe that the Fed will maintain their dovish stance on interest rates – keeping them at zero out into the future. But I am on the fence as to whether they will take any action regarding QE4 – in order to weaken the dollar and create more inflation. In advance of the FOMC meeting, I would expect to see market consolidation along with the VIX (market volatility index) in the 15 to 17 range. The RUT (Russell 2000 Index of small-cap companies) along with the 10-year bonds are pricing-in a dovish FED meeting. I believe that the FED can sell more HOPE’ium with its zero interest rate policy alone. If the FED introduces more QE – then the volatility should be reduced, and the market will indeed move higher.
Between now and the end of year, this market will favor the nimble investor. You won’t be able to get too long or too short. If you’re the type of investor that wants to hold something for more than a week or two at a time – this won’t be a great market for you as the FED’s stars are beginning to align. The FED needs a stronger dollar and weaker CPI in order to justify more QE, and to keep interest rates at zero for a longer period of time. If the FED mentions deflationary concerns at the FOMC meeting, this will fuel rumors surrounding QE4. And with the weaker CPI (1.7%) and the FED’s concern about ‘slack in the labor market’ and ‘structural unemployment problems’, there is a possibility that they may NOT end QE3 just yet and let it play out a little while longer.
Personally, I’m reminded of a line from the movie ‘War Games’ where Joshua (a computer) says: “The only winning move is – NOT to play.” Right now I fear our market is stuck between the big correction and the all-time highs, and we will remain there until yearend.
We have all heard the saying: “The market has no memory from day to day”, and that certainly applies to this market. Just a little over a week ago, the market was talking ‘doom and gloom’ and now it’s singing ‘Happy days are here again.’ The past week, the S&P had its best week in almost 2 years. This coming week has many major energy and oil companies reporting earnings, so I expect some downward pressure on the markets. I’m seeing potential trades in names such as: AAPL, IBB, FDX, COST, DPS, CME, CBOE, ICE, WYNN, TEX, SLW, IYT, TRV, UTX, HERO, XLE, UPL, PAA, KMI, VRTX, AMGN, and REGN.
Remember, over 75% of the time – the week before Halloween has an upward bias associated with it. I’ll be watching the RUT (the Russell-2000 Small-cap Index) as my ‘tell’ for this market.
In response to readers asking for more exact stock picks, I have constructed some recommendations below; however, you may want to pause until after the FOMC meeting – just in case there are any fireworks. Also please note, I continue to move from investing ‘directionally’ (which I find extremely difficult in this environment) – to investing in what I think will NOT happen. Below – you will see that I think WYNN, YELP will move lower (so I’m selling Call Credit Spreads), while believing that GMCR, NFLX, IBM, AMZN, and DECK will move higher (and therefore selling Put Credit Spreads.)
- Wynn Hotels (WYNN) – Sell the 202.5 / 205 Call Credit Spread with the momentum waves negative and the daily squeeze is waiting to fire short,
- Yelp (YELP) – Sell the 65 / 67 Call Credit Spread with the momentum waves negative and daily squeeze firing short,
- Green Mountain Coffee (GMCR) – Sell the 136 / 134 Put Credit Spread – with the theme of the week being upward and the momentum waves being positive,
- NetFlix (NFLX) – Sell the 362.5 / 357.5 Put Credit Spread as the ‘squeeze’ is causing a reversion to the mean,
- Deckers (DECK) – Sell the 77 / 75 Put Credit Spread with the theme of the week being upward but cautious due to the mixed momentum waves,
- IBM – Sell the 155 / 152.5 Put Credit Spread with the theme of the week being upward but cautious due to the negative momentum waves,
- Amazon (AMZN) – Sell the 265 / 260 Put Credit Spread with the theme of the week being upward but cautious due to the negative momentum waves,
- S&P Index (SPX) – Sell the 1920 / 1915 Put Credit Spread – with the theme of the week being positive, but wait until after Wednesday’s FOMC meeting for confirmation,
- Nasdaq (NDX) – Sell 3910 / 3905 Put Credit Spread – with the theme of the week being positive, but wait until after Wednesday’s FOMC meeting, and
- The Russell 2000 (RUT) – Sell the 1070 / 1060 Put Credit Spread – with the theme of the week being positive, but wait until after Wednesday’s FOMC
My current short-term ‘Larger-Cap’ holds are:
- KO (Beverage) – in @ $41.17 – (currently $41.03),
To follow me on Twitter and on StockTwits to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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