RF's Financial News: November 2014

Sunday, November 30, 2014

This Week in Barrons – 11-30-2014:

You can fool some of the people all the time, and all the people some of the time, but you can't fool all the people all the time… Abraham Lincoln.

Thoughts:

Dear Ms. Yellen:

Are we being played for a fool? Let’s start with President Obama’s immigration policy – especially as to how it applies to California. Just last week the L.A. Times reported the following about Los Angeles County and their illegal immigrant population:

- 40% of all workers (10.2M people) are working for ‘cash’, not paying taxes, and are predominantly illegal immigrants working without green cards.

- 95% of all murder warrants, and 75% of the ‘Most Wanted List’ are illegal immigrants.

- 66% of all births are illegal immigrants on Medi-Cal (paid for by the CA. taxpayers).

- And almost 60% HUD occupied properties are illegal immigrants.

I would be remiss and foolish if I didn’t ask: Is there a PLAN to help California and the other border states handle this huge influx of 5M new illegal immigrants? Or is the plan to bankrupt these states, make them even more ‘beholding’ to the government, and to gather the 2016 Hispanic vote for the Democrats all in one ‘fell’ swoop?

By now you know that last Friday, OPEC decided (some thought foolishly) to keep oil production levels unchanged. The effect of lower oil prices is essentially QE4, as the consumer will have more money to spend. Oil ended Friday slightly lower then $66 per barrel with energy companies, oil transporters, and rigging companies all ‘taking it on the chin’. In my mind, OPEC is playing us all for fools. J. Q. Public may cheer for lower gasoline prices, but the bigger issue is our domestic oil and shale oil production – that is getting significantly squeezed on margins and could see a decline if oil prices remain under pressure. The Saudi’s ‘get it’. They are willing to inflict pain on our shale oil business, while at the same time put pressure on Russia's exports. The Saudi’s can sell every drop of their oil to China, and at the same time poke a stick in the eye of the ‘petro-dollar’.

Ms. Yellen, maybe I’m becoming foolishly paranoid, but aren’t the risks caused by a strong dollar becoming increasingly apparent:

- Disinflation pressure is continuing to rise, and bringing with it the risk of deflation.

- The trade gap is continuing to widen, which is beginning to stall U.S. GDP growth.

- And employment is coming under pressure as domestic manufacturing and production slow. This will cause U.S. multinationals to become less competitive, and encourage them to expand overseas to avoid currency risk.

Ms. Yellen, is the bigger fool the U.S. consumer? Factually, the largest driver of general consumer consumption is credit. It’s not just houses and cars, but understanding that the holiday season causes a huge expansion of credit spending. Currently credit cards are the number one consumer purchasing method. The average credit card balance for the U.S. consumer is: $7,743. Currently, the U.S. has over $847 billion in outstanding consumer credit card debt. But the problem is NOT ONLY the expansion of credit, but also stagnant wage growth combined with a questionable ability to re-pay the debt. Using the CPI to adjust for inflation, wage growth has actually declined over the past decade. J. Q. Public’s ability to pay down debt is becoming insurmountable, and producing larger balances carried for longer periods of time. Everyone always talks about the stock market rally, but seems to look past the parabolic debt acceleration that has occurred during that same time period.

I always remember a quote from Mark Twain: It is better to keep your mouth closed and let people think you are a fool, than to open it and remove all doubt.

Markets:

Factually:

- Orders for U.S. business equipment unexpectedly declined by 1.3% in October.

- Jobless claims increased more than expected – which is rare for the holiday HIRING season.

- Durable goods orders (removing planes and cars) fell by 0.9%.

- The Consumer Confidence Index was down sharply in October.

- Wal-Mart had 22 million people visit their stores on Thursday and Friday. That is more people (in one day) than Disney World gets in an entire YEAR.

The markets have been in a dogfight for the past week. We opened Monday with the DOW at 17,812 and ended the week at 17,828. While along the way there were dips and pops, the overall market really only traded sideways. That's a little bit disturbing because the Thanksgiving Holiday week is usually positive. But the market has felt ‘heavy’ for two weeks. While the market makers have dug in their heels and kept the wheels from flying off, I can sense a level of desperation and ‘control’. I will NOT be surprised if we see some true ‘red’ show up next week. A likely scenario is to see a bit of a pull back for a week or two, and then a final run up into the Holidays for ‘the Santa Claus rally’.

Right now the market is ‘flat’, and probing for direction. The market has certainly proven that it can pop higher for no apparent reason, but I’m looking for a bit of ‘profit taking’ this week. It might not happen, as the market makers have managed this market from command central, but it ‘feels’ like it should.

Tips:

The OPEC meeting has caused a new shift in the market. With oil prices at a 4-year low, the oil stocks and our largest sector (energy) have been crushed. This move should give the consumer more discretionary income, and should push the retailers and the airlines higher. But the market (in general) will have a more difficult time going higher – in the face of a declining energy sector. I think we will see more volatility on the horizon, and that large caps will do better than small caps in the short term. I have been looking for the Russell 2000 Small-Cap Index to go lower this coming week, and therefore investing in the TZA (the inverse ETF) should work nicely. This next week should be interesting as traders are back from the holiday, and will begin to digest all of this new information.

My current list of potential candidates includes: GILD, AAPL, WYNN, ALL, PII, HSY, FLR, BMY, DPS, TEX, SLW, TRV, SPX, RUT, DUST, VXX, TZA, SPY, IWM, JNJ, MSFT and UTX. Kroger (KR) reports earnings on Thursday, and I would like to get a trade in Kroger if I can get a good set-up.

I’m looking at the following Iron Condors (all with a Risk/Reward of less than 6:1):

- GILD – Dec1 – 95/96 to 106/107 for $0.14, - 1:6 risk v reward,

- RUT – Dec1 – 1155/1160 to 1210/1220 for $1.42 – 1:6 risk v reward,

- SPX – Dec1 – 2030/2035 to 2100/2105 for $0.80 – 1:6 risk v reward,

- WYNN – Dec1 – 169/170 to 185/186.5 for $0.22 – a 1:5 risk v reward,

I’m also seeing the following actions for next week:

- DUST going higher – which means the miners and gold are going lower,

- VXX going higher – which means a downturn in stocks,

- TZA going higher – which means the Russell 2000 (RUT) is going lower,

- SPY and IWM going lower – which means that the S&Ps are heading lower, and

- I’m showing JNJ and MSFT going higher.

To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.

Please be safe out there!

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Sunday, November 23, 2014

This Week in Barrons - 11-23-2014

This Week in Barrons – 11-16-2014:

Thoughts:

Dear Ms. Yellen:

Are we having an ‘all out’ currency war? The reason I ask is that I’ve seen this behavior before – where assets, commodities and debt all begin to lose their relationship with each other – and out pops the American Revolution, our Civil War, World War I, and World War II. With China’s announcement of ‘almost’ QE on Friday, I think that we are in a full-out currency war with the rest of the world.

Just when I thought the BRIC nations (Brazil, Russia, India & China) would be rational and watch the rest of us (Japan, U.S. and Europe) fight it out – they have now decided to act. I was shocked when China (the world’s fastest growing and second-largest economy) announced an interest rate cut of 40 basis points from 6% to 5.6%. They also freed up deposit rates – allowing savers to participate in a higher return. And, right on the heels of China’s announcement, Europe’s Draghi ran to the nearest microphone to say that the ECB will go ‘ALL IN‘ – doing everything in its power to do more QE. And this even triggered India to think about doing ‘more stimulus’.

My take away from all of this is:

- The global economy is slowing – faster than I expected,

- The world is hurtling towards a depression – faster than I expected,

- And every central bank is going to try and destroy their currency in a bid to pay their debts with cheaper money – faster than I expected.

I realize that the stock markets will rally on the idea of more printed money, but we all know how this ends. First it was Japan, then the U.S., then Japan again, now China, and soon Draghi will try his best to circumvent the entire Euro zone Charter and find a way to print more money.

Ms. Yellen, doesn’t this put you into a tricky situation? The general expectation is that the Fed will raise rates at the beginning of next year. However, with your measuring stick of inflation (CPI) recently ticking lower to 1.7% - doesn’t this raise a ‘deflationary’ concern? And now with China, Japan and Europe all ‘putting the squeeze on’ – couldn’t we easily see the CPI contract to 1.5% as the dollar index spikes to 90 or higher? And won’t this ‘spike higher’ (a) widen the trade gap, (b) negatively impact every multi-national company’s top-line revenues, and (c) cause manufacturing jobs in the U.S. to shrink and (once again) move abroad.

Ms. Yellen, my questions are:

- How long can you take the pain of a strong dollar, and the risk of deflation?

- And with Japan’s announcement (last week) of them dipping into a recession – isn’t that a vote against QE? (As an aside: One of Japan’s latest ideas is to hand out gift cards to ‘poor people’ and let them go and ‘buy anything they want’. I can’t make this stuff up!)

Ms. Yellen, can you tell me again how all of this ends well?

The Market:

In a world where the BRICs (Brazil, Russia, India & China) are joining together to form their own financial bank and trading agreements, and as nations have attempted to move away from the U.S. dollar – a pattern of behavior seems to have emerged:

- Remember Libya's Ghaddafi? He declared that he wanted to begin to refuse the dollar. He called on all Arab and African nations to establish a new African continent using a new currency – the gold dinar. What was the outcome for Mr. Ghaddafi? He was overthrown by the U.S. government and NATO, and later killed.

- Remember Iraq’s Saddam? He declared that he wanted to sell his oil for Euro’s instead of U.S. dollars. What was the outcome for Saddam? The U.S. invaded Iraq due to terrorism and suspicion of harboring weapons of mass destruction – he was later killed.

- Remember Christophe de Margerie – the CEO of ‘Total’ the huge French oil conglomerate. This is what he said this summer concerning the purchase of oil in U.S. dollars: “It would be good if the euro was used more. The fact that oil prices are quoted in dollars per barrel does not mean that payments actually have to be made in that currency. There are no valid reasons to pay for hydrocarbons in the American national currency." He also spoke out against the Russian sanctions imposed by the U.S. What was his outcome? He was killed in a ‘freak’ plane crash.

So, you either jump on board with the U.S. dollar – or you end up ‘dead’ is the way that I see it.

In terms of the market, the bottom line is that this market is grossly overbought. Central Banks are hoping that by pushing the market to insane heights it will cure the economy's ills. It won't, but it seems like the last option at this point. The only thing holding this market up is the banksters and their behind-the-scenes maneuvers. I can see them pushing the market higher, trying to keep everyone feeling good for the Holiday shopping season – but that’s a nervous ‘hold’ for me.

If you've been in this game as long as I have, you've seen:

- The ‘Tech’ Bubble of the late 90's – and the resulting crash,

- The ‘Housing’ Bubble – and the resulting crash,

- The ‘Credit’ Bubble – and the resulting crash / financial meltdown,

- And now we're in the ‘Central Bank’ bubble – it too will crash.

There is a good reason why so many of the most respected fund managers are woefully behind the market this year. This year most of them remained on the ‘side lines’, or put very little of their cash to work. They are seeing the same things that I do and that is: no volume, Central Bank rigging, and earnings created with buy-backs. This is NOT a signal of a healthy market.

This week we saw the Chinese cut rates, Draghi go "ALL IN" on QE, and Obama shortcut the Constitution and print trillions more dollars in order to accommodate 5 million more ‘new citizens’. All that was enough to send the market soaring on Friday.

History shows that we normally levitate up through the Thanksgiving Holiday, and I could easily see them doing that again. But, it’s going to be more of a struggle this time. When you have China cutting rates, Draghi starting QE, and we can't even hold a 100-point day – you know that things are desperate. This market is tired and heavy. I’m going to approach this week as I did last – leaning long but with my finger near the sell button.

I wish everyone a Happy Thanksgiving. It’s my favorite holiday, and I truly enjoy spending time with friends and family.

Tips:

I am not bearish here, but I continue to feel that more consolidation is in order. I talk to other traders, and we scratch our heads looking at the last 5 weeks. I know it seems like ancient history, but if you recall – remember all the gloom and doom 5 weeks ago when the S&P was at 1817? We are currently at 2071, which is 254 points ‘straight up’ in 5 weeks. If you have traded for very long, you have seen this game before and you know how it ends. I certainly don’t want to fight this move as we will likely have even more upside, but everyone being so bullish and ‘risk-on’ makes me nervous.

My current list of potential candidates has grown from last week and is as follows; DDD, APA, MCD, DFS, DKS, JEC, GILD, PEP, PII, WGO, ALL, MET, PRU, KSU, ABT, AAPL, WYNN, FDX, HSY, FLR, BMY, DPS, TEX, TRV, UTX, and KR.

I’m looking at the following Iron Condors (all with a Risk/Reward of less than 4:1):

- GILD – Dec1 – 92/93 to 108/109 for $0.19,

- IBB – Dec1 – 275/277.5 to 310/312.5 for $1.18,

- IBB – Jan 2015 – 260/265 to 325/330 for $1.15,

- RUT – Jan 2015 – 1060/1070 to 1260/1270 for $$1.88,

- WYNN – Dec1 – 169/170 to 190/191.5 for $0.30, and

- WYNN – Dec 2014 – 164/165 to 194/195 for $0.20