This Week in Barrons – 12-28-2014:
Dear Ms. Yellen:
As I look back over 2014, I’m thinking that there are areas where we (as a nation) could improve. The other day, I was reminded of the following scenario. A Japanese company and an American company decided to have a rowing race. Both teams practiced long and hard, but on the big day – the Japanese won by a mile. American senior management formed a committee to investigate and recommend appropriate actions. Their findings were:
- The Japanese had 8 people rowing and 1 person steering.
- The Americans had 1 person rowing and 8 people steering.
- Given the large disparity, the committee wanted another opinion and hired a high-level consulting group.
- The consulting group concluded that there were too many people steering, and not enough people rowing in the American boat.
Armed with recommendations in hand, the Americans immediately:
- Reorganized the rowing team into: 4 steering supervisors, 3 area steering supervisors, and 1 assistant superintendent steering manager.
- Implemented a new performance system that gave the 1 person rowing the boat a greater incentive to work harder.
- Re-named the program: “The Rowing Team Quality First Program.”
- And initiated discussions surrounding getting new paddles, canoes, other equipment, and extra vacation days for practices and bonuses.
A year later the race was held again, and this time the Japanese won by 2 miles. American management was humiliated and immediately initiated the following:
- They laid off the single rower and blamed him for poor performance.
- They halted the development of a new canoe, sold the paddles, and cancelled all capital investments in new equipment.
- The money they saved was distributed to the Senior Executives as bonuses.
- And decided to outsource next year’s racing team to India.
Ms. Yellen – although the above was written in jest – the issue within our ‘American’ labor force starts with there being an abundance of unskilled over skilled labor. And even among the skilled labor positions, only certain sectors are in demand for the high paying jobs. The highest paying degrees are in: programming, engineering, math and science. However, our American colleges produce far more graduates with degrees in psychology, political science, history, and English. In fact, the majority of people that get these ‘NOT in demand’ degrees rarely find a job in their field. Also (from statistics compiled by Complete College America), only 19% of full-time students earn their degree in 4 years. This same report shows that most students take far too few credits per semester, and fail to register for required courses on time. In fact, the ONLY graduation category that is not declining is the one devoted to – foreign students. Not only are students from abroad graduating on time and with better grades, but they are also the majority of students in the math and science degree programs. The majority of these foreign students do NOT stay in the U.S., but rather return home to their native countries. These students are under far more pressure and expectations, because (in many cases) their parents have struggled to pay for them to leave their country in order to get a degree in America – the land of opportunity. I guess it’s no wonder that the Japanese team won the rowing contest – aye?
Ms. Yellen, continuing on the education theme. This week I read an article about the leaders of Singapore and Jamaica. In 1965 both nations were independent, had about 5 million citizens each, with Jamaica having a slightly higher per capita GDP than Singapore. The leader of Singapore decided to borrow and invest heavily in education, basic infrastructure, and took a ‘Free Market’ approach to entrepreneurship. The leader of Jamaica borrowed money, and built a huge social program focused on exporting agriculture and trying to expand government ownership. By 2000, Singapore’s per capita GDP was over $30,000 while Jamaica’s was a mere $4,800. Singapore’s investment in education and encouragement of free market entrepreneurialism allowed the nation to thrive, while Jamaica’s massive socialism, central planning, and government ownership simply stifled growth. Ms. Yellen, I’m assuming if we raced Singapore – the American team would suffer the same fate as we did against Japan. Therefore (if you have a minute), could you try and schedule a race between the Americans and the Jamaicans?
Thanks and have a Happy New Year.
- Consumer spending rose 0.6% while New Home sales fell another 1.6% in November.
- November’s durable goods orders were expected to rise 0.3%, but instead fell 0.7%.
- The Japanese parliament just approved an additional 3.5 trillion yen stimulus package – so it’s fair to say that traders will be happy as they contemplate more ways to utilize the carry trade.
- Blackrock told its investors that corporate profits would be 85% LOWER if corporations were forced to comply with GAAP (Generally Accepted Accounting Principles). Yes – corporations are almost doubling their profits by using false accounting methods. So if corporations are allowed to report double their earnings, what numbers can we believe?
- 3rd Quarter GDP was revised to 5%, with the bulk of that being increased healthcare spending over Obama-Care. Some are reporting that healthcare costs in 2015 will rise from 8% to 26%, and that could trigger a corresponding collapse in bond prices.
- The issue with tumbling oil prices is that the energy sector has been the main driver of job growth during our recovery. The latest jobs report showed a sharp downturn in the number of oilrigs operating in the U.S. This will be just the beginning of cutbacks as there is a normal 18-week lag between oil price reductions and the number of rigs in operation. You can expect the rig count at U.S. shale-oil production sites to drop off at the beginning of the New Year. This is because the low oil prices will cause many of the rig contracts (which expire at the end of this month) to go un-renewed.
- And the International Longshore and Warehouse Union has started a work slow-down as negotiations have stalled over their expired contract. The slowdown is affecting everything from merchandise supplies destined for U.S. retailers to McDonalds’ french-fry supplies headed for Japan. As a result, global economic data involving trade, durable goods and retail sales could be softer than expected in the coming weeks.
Personally, I received a terrific book this Christmas: “Money – Master the Game” by Tony Robbins. The focus of the book is that every individual needs to (and can) manage his or her own money. For example: say someone came to you with a deal where YOU would put up 100% of the capital, and YOU would take 100% of the risk on an investment. And IF the investment made money, THEY would take over 60% of the profits (to be paid to them in the form of fees). And, IF the investment lost money, YOU would absorb 100% of all the losses, BUT you would still owe them their fees. Who would take such a one-sided investment? The answer is that millions of people do that everyday when they buy a mutual fund. Why do millions of people do it? They do it because they never do the math. For instance: If you made a onetime investment of $100,000 at age twenty, (assuming a 7% annual growth rate) you would have $574,464 by the time your 80th birthday rolled around. BUT, if you paid the normal management fees and other expenses associated with a mutual fund – your ending account balance would only be $140,274 over that same period of time. That means you paid 77% of your profits ($439,190) to your account manager / broker. That is the single best reason I ever heard for someone to learn how to manage their own finances.
I bring this up because our retiring population is in trouble. Here are a couple of facts that: “Retirees Won’t Tell You”:
- They’re running out of money – as 33% have less than $1,000 in savings.
- They’re finding retirement stressful and lonely.
- They’re finding that their healthcare costs are enormous.
- They’re planning on moving back in with their children. Currently over 43M adults care for someone over 50 – and that number is rising.
- And they’re coming after traditionally entry-level jobs. The percentage of workers 65 and older who are in the labor force has risen from 11.5% in 1992 to 18.5% in 2012, and is projected to hit 23% by 2022
This week we should see the market continue to move sideways and up, but it’s times like these when I’m most nervous. The safest way to play this market is in the ETF arena because as the overall market rises – a specific stock may not. There are ten major sectors in the S&P. If the market dislikes a particular sector or stock on any given day – you may get crushed holding that particular stock. But if the other sectors move high enough, the overall S&P would rise on the day. This is why you can see the SPX and the SPY (the ETFs for the S&P index) rise on a day when even big stocks like Apple, Microsoft, 3M and Cisco are down. For the next week I like the indexes: SPX, SPY, DIA, RUT and IWM. I think that they will continue higher, but don’t be surprised if we have a ‘red’ day here and there. We're overdue for one – so that the technicals catch up with the underlying issues.
I’d like to take this time to refresh your memory on two income strategies that I use on a weekly basis: (a) the iron condor, and (b) the butterfly & put credit spread combination. First, a ‘spread’ is the selling and buying of two similar options – with the same expiration date and quantity. When you ‘sell’ a spread – money will be ‘paid’ to you and deposited into your account. The low end of the spread is called a ‘Put Credit Spread’ (PCS), and is accomplished by selling a put and buying another of lessor value (in the same quantity and expiration date). The upper end is called a ‘Call Credit Spread’ (CCS), and is accomplished by selling a call option and buying another of higher value (in the same quantity and expiration date). You make an ‘Iron Condor’ by combining the put credit spread and the call credit spread. You make money on the ‘Iron Condor’ as long as your stock is between your two strike prices at options expiration. A picture describing such a transaction is below. The timeframe for this strategy is anywhere from a week to 6 months. It is often used on indexes and other stocks that don’t move around that much. I would NOT use the strategy on high volatility stocks such as Tesla (TSLA) or Green Mountain Coffee (GMCR).
The second income strategy that I use is on stocks that are moving in one direction (let’s assume rising for this example). I sell a Put Credit Spread (as was described above) to take in some premium to pay for a Butterfly – creating (in essence) a free trade. The Butterfly (as shown below) is the sale of an option – surrounded by the purchase of two other options. This creates an earnings effect that peaks where you sold the option and rises or flattens where you purchased the surrounding options (often called the wings of the Butterfly). I use this strategy on the up side when stocks are rising – such as over the Christmas holidays, run-ups into earnings, or when a particular stock is ‘bouncing’ higher after being punished too badly.
The market has put in an excellent run of over 1,000 DOW points and is currently extended. But having said that – we are in the ‘Santa Claus’ portion of the ‘Santa Claus Rally’ so I would expect an upward bias for next week. We could see some profit taking – for those brokers who wish to take advantage of the 3-day clearing period, but for the most part – we should move slightly higher.
My current list of potential candidates is as follows: Apple (APPL), Gilead (GILD), Restoration Hardware (RH), Kroger (KR), Polaris (PII), United Health Care (UNH), 3M (MMM), Marathon Oil (MRO), Devon Energy (DVN), CVS, Chicago Bridge and Iron (CBI), Home Depot (HD), Clorox (CL), Caterpillar (CAT), and John Deere (DE).
Our base positions continued along their winning ways last week in: FXY (Japanese Yen to the downside), FXE (the Euro exploded to the downside), XLP (Consumer staples exploded to the upside), and XLV (Healthcare gradually moved to the upside):
- FXY – March 2015 - $83 PUTS,
- FXE – March 2015 - $124 PUTS,
- XLV – January 2015 - $69 CALLS, and
- XLP – January 2015 - $48 CALLS.
For last week – our WAG, NKE, FB, SPX, NDX, and RUT trades went in our favor, with the GILD and PCLN going against us. For next week I’m selling this market’s upside bias via Put Credit Spreads (PCS) – and playing the upside with Butterflies.
- AAPL – JAN – SELL the +105/-107 PCS (Put Credit Spread) – and BUY the +115 / -117 / +118 Butterfly to take advantage of an earnings run-up,
- GILD – JAN1 – SELL the +88/-89 PCS – and BUY the +94 / -96 / +97 Butterfly,
- GILD – JAN – SELL the +82.5/-84 PCS – and BUY the +94 / -99 / +102 Butterfly,
- IBB – JAN1 – SELL the +287.5/-290 PCS – and BUY the +307.5 / -315 / +320 Butterfly,
- IBB – JAN – SELL the +280/-282.5 PCS – and BUY the +307.5 / -315 / +320 Butterfly,
- KR – JAN – SELL the +60/-62.5 PCS – and BUY the +62.5 / -65 / +67.5 Butterfly for an earnings run-up,
- CBI – JAN – SELL the +36/-38 PCS = Credit of $0.20,
- NDX – JAN1 – SELL the +4075/-4100 PCS = Credit of $2.03,
- SPX – JAN – SELL the +1990/-1995 PCS = Credit of $0.40,
- SPX – JAN1 – SELL the +2050/-2055 PCS = Credit of $0.40,
- RUT – JAN – SELL the +1135/-1140 PCS = Credit of $0.40, and
- RUT – JAN1 – SELL the +1170/-1175 PCS = Credit of $0.37.
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!
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting: < > .
Please write to Mr. Culbertson at: <email@example.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference < >.
If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is the handle.
If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.