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) expand their QE program by 40%, and (b) the Bank
of Japan will triple their purchases of Exchange Traded Funds. Unless I’m misunderstanding this, it means
that they are directly buying into their own stock market.
- 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.
Tips:
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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