This Week in Barrons – 11-2-2014:
“QE Infinity … and Beyond!” … Buzz Lightyear
Dear Ms. Yellen:
Ms. Yellen, congratulations on ending QE. As I remember the movie Toy Story, I wish you the best of luck making sure that our economy (like Buzz Lightyear) glides slowly in for a safe landing. But – say it ain’t so that:
- Alan Greenspan said: “QE did NOT help the economy, the un-wind will be painful”, and he recommended buying gold.
- Hillary Clinton said: “Don’t let anybody tell you that it’s corporations and businesses that create jobs.”
- Nancy Pelosi said: “Unemployment benefits are creating jobs faster than practically any other program.”
Japan announced that they will (a)
- The European Central Bank (ECB) is going to announce their own QE program after their meeting on November 6th.
- U.S. corporate earnings and economic data (GDP, housing, jobless claims and consumer) are coming in weaker than anticipated, and your FOMC statement was more ‘hawkish’ than normal.
- The 3.5% GDP number showed a weak consumer, and was only bolstered by the largest gain in defense spending since 2009.
- The barrier to higher real estate sales has nothing to do with home prices or mortgage rates, but rather with jobs and income. “We don’t have enough jobs, and the jobs we do have don’t pay enough; therefore, the result is the lowest level of home ownership in 19 years.”
- Your ‘hawkish’ tone and implied interest rate increases are just ‘talk’ – yes? Because increasing interest rates with the CPI (consumer price index) continuing to fall and the dollar continuing to rally is simply financial suicide for the U.S.
Ms. Yellen, again thanks for ending QE, and ‘Thank You’ in advance for a potentially great holiday season for the equity markets. But won’t it be difficult to grow our economy if our own currency continues to rally, disinflation begins to really take hold, and our labor market continues to have structural problems?
Finally, Ms. Yellen, there’s a rumor out there that you did NOT really end QE. The rumor-mill says that you currently have $4 Trillion worth of U.S. Treasuries and mortgages on your books. As those treasuries mature and pay the coupon and as those mortgages continue to pay – the FED will be making about $500 Billion dollars a year. The rumor mill says that you’re going to use this money as a small replacement for QE. Please, say it ain’t so!
So for those looking for ‘actionable’ advice: Don't do a darned thing right now, because the crosscurrents are enormous.
- The FED just took away the punch bowl, but there are national elections next week.
- Economists are already debating whether the rate hikes will begin in the spring of 2015 or 2016.
- Consumer confidence is at an all time high (a level not seen since November of 2007), which is the very month the market started to roll over into its deepest drop in decades.
- U.S. durable goods declined in September – missing estimates by a mile.
- UBS set aside $2 Billion for illegal currency rigging and tax evasion settlements.
But ‘oh look’ we’re at all-time, new highs. According to JP Morgan, QE added $9 Trillion In ‘Equity Wealth’, which translates to 32% of the current S&P 500 level. QE not only distorts interest rates, but also distorts corporate earnings by allowing corporations to buy-back their own stock at sadly deflated rates. But the fact that we’re at all-time highs does NOT mean that we're clear of any danger zones and ‘full-speed’ ahead.
I understand that:
- November is generally a good month for stocks, especially the second half of November.
- Japan is going to be buying US stocks.
- The FED is not totally out of the QE game due to their reinvestment philosophy.
- Most companies do their buy-backs in November.
- The election is on Tuesday, and it appears as if the Republicans are going to rout the Democrats.
If the Republicans take control, we could hear all manner of things coming out of Congress – from a call to impeach Obama to noise over Illegals, to Obamacare. In other words, elections have consequences, and some of the things the Republicans might say, could rattle the market. So, I'm looking at these last few days of rally with a more than skeptical eye. This rally feels more like a ‘last dash’, ‘throw the kitchen sink’, desperation rally – than a healthy march forward. I need to see what kind of shape we're in by the end of the week.
For Monday, Tuesday and most of Wednesday I would expect to see more chop than trend – as everyone dissects the results of the election. But by Thursday and Friday we should get pretty serious hints as to the near term direction of the market. Frankly, I’m just not convinced that this blast higher is going to hold up. If the market is going to start another true leg higher, I will have time to get involved – otherwise, there is no reason to go ‘all in’ right now.
Watch the IWM, the XLF and the SMH this week. These three ETF's are very good indicators for where things are going to go. If they all hold up, then yes, we will be heading higher. But, if they get mixed or red – then you should exercise caution.
QE Infinity … and Beyond! That is what we received last week – as Japan picked up (increased QE) where the U.S. FED left off (ending it’s QE). The Japanese QE gave the Nikkei a 5% boost higher, the European markets a 2% higher, and the U.S. markets another record all-time high.
However, there is a lot of crazy stuff going on in this market. The good new is – after you’ve been trading for a while – ‘everything old is new again.’ The biggest ‘curve ball’ that is going on in this market – is that the dollar index is exploding higher. This is laying the pattern for something that is MASSIVE – coming down the line. When a key asset (like the U.S. dollar) changes – the ripple effect touches everything. When money is flowing into the U.S. dollar, it means that it’s flowing out of emerging market economies. The challenge is (a) trying to balance out what is going to happen to the world over the next couple of years, and to (b) make sure that we can make money next week. First, anything that is correlated to U.S. dollar moving higher, and non-correlated assets will be moving lower – such as the Euro.
I think that the market is extended here and we should see some consolidation. One element to be aware of is an ECB meeting on NOV 6th. If the ECB follows Japan with more QE, we will see more upside to our markets. My current list of ‘watch’ candidates includes: MMM, IBB, FDX, ALL, PII, HSY, FLR, BMY, DPS, TEX, SLW, IYT, TRV, UTX, XLE and TWTR (possibly to the upside).
1. The Euro is going lower; therefore, consider buying the March 2015 - $127 PUTS on FXE for $4.57 per contract.
2. Gold is going lower. GLD will move from $116 to under $100, and SLV will go down along with it. Consider buying December 2014 - $17 PUTS on SLV for approximately $1.69 per contract.
3. Consider purchasing December 2014 - $118 CALLS in TLT (bonds) for approximately $3.00.
4. Consider selling the SPX - December 2014 – Iron Condor – 1875 / 1880 – 2095 / 2100 – and buying a December 2160 call as protection – with a 1:3 risk/reward ratio.
5. Consider selling the RUT - December 2014 – Iron Condor – 1070 / 1080 – 1240 / 1250 – buying a December 1250 call as protection – with a 1:3 risk/reward ratio.
My current short-term ‘Larger-Cap’ holds are:
- KO (Beverage) – in @ $41.17 – (currently $41.87),
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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