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.
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.
- 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.
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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Until next week – be safe.