This Week in Barrons – 9-28-2014:
Dear Ms. Yellen:
Ms. Yellen, are you at all worried that we’re loosing the currency devaluation race? Europe and Japan are printing money like there is no tomorrow. Even China stuck a $500 Billion QE toe into the shallow end of the pool. This dual blast from the Pacific and Atlantic is sending the dollar higher. The dollar rally is causing a little deflation, which is showing up in such things as the reduced price of gasoline – just in time for the November mid-term elections. I was thinking, given your balance sheet now contains over $4 Trillion in short term maturities, can’t you just keep rolling $100’s of Billions of dollars back into the economy as these short-term maturities come due? So I think you have a built-in QE – yes? And I don’t think you’ll need to PRINT any more money, unless (of course) either government deficits increase or you wish to raise interest rates. I’m betting you’re going to start discussing these things right after the mid-term elections – am I right?
Ms. Yellen, due to the re-engineering and re-design of ALL of our economic indexes: GDP (target of 5% growth), Unemployment (6%), and Inflation (1.5%) – are these targets sheer fantasy at this point? For example, even though the 2nd quarter estimates for GDP were raised to 4.6% - the Commerce Department itself said ALL categories looked strong - EXCEPT Consumer Spending. That’s like saying: “You’re in great health – EXCEPT for having Cancer.” Any high-school sophomore knows that two-thirds of the economic activity comes from the consumer. So if consumer spending remains weak, how are the GDP estimates revised higher? Oh – I remember – that’s why you re-engineered and re-designed the GDP calculation to include $100’s of Billions of (previously not-counted) non-tangible assets – my apologies.
Ms. Yellen, does it bother you that for the first time in many decades, the entire Board of Governors of the Federal Reserve will be completely appointed by one President (Obama)? Imagine if Obama were able to appoint every Justice on the Supreme Court, we would most likely have a one-sided Supreme Court. Aren’t you at all worried that we now have (and will continue to have during your 14-year team) a one-sided FED? In fact, during the last FOMC meeting, the only dissenting members against your policies were non-Obama appointees – Mr. Fisher and Mr. Plosser. With the recent resignations of Mr. Fisher and Mr. Plosser, doesn’t it feel a little bit like: ‘marrying your sister’?
Ms. Yellen, your monetary concept is frequently referred to as ‘inflating your way out of debt’. Under this scenario, you’re hoping that prices will increase enough to offset our debt obligations. I agree with the concept, as long as it’s attached to a reasonable understanding that the debt will be repaid. Does it bother you that mathematically there is no hope of the U.S. ever repaying its debts?
And lastly Ms. Yellen, on the subject of interest rates – isn’t this simply the ‘chicken and egg’ problem? Meaning, if you want to end QE and the FED buying U.S. bonds, you will need to find someone else to buy the bonds – yes? The only way to generate interest in our bonds is by offering a compelling interest rate. However, if you raise the interest rate – you: 1) stall economic growth, and 2) further increase government deficit spending because the interest on the existing U.S. debt would increase astronomically. Hence, I don’t understand how you can ever raise rates without stalling economic growth and increasing government deficits – but then how do you find buyers at non-competitive prices. Oh – I forgot about funneling these ‘fake purchases’ thru Belgium – my apologies.
Ms Yellen, I’m worried that when the ‘s**t hits the fan’ (and it will), everyone that believes in these numbers and has followed you – will act surprised and say – “No one saw that coming!” Just like those blind ideologues did during the housing crisis and the dot.com crisis before that. Oops – I guess that’s why history continues to repeat itself – again, my apologies.
- Stock outflows continued – making it 21 out of 22 weeks that we’ve seen an outflow from stock funds.
- Mortgage applications fell by over 4.1% again last month. Houses aren't selling because millennials don't necessarily want a house, and because nobody has the money to buy them anyway. And (to add insult to injury) delinquent home mortgages increased 5% last month.
- The auto industry is being fueled by subprime loans. Lately, many subprime loans come with a ‘start-blocker’ installed in the car. That means if you're late on a payment, they turn the switch, and no matter where you are, your car won't start any more – until you pay.
- When you think manipulation, the DOW index is composed of 30 stocks; the Russell index of 2,000 stocks. With the DOW continuing to make new highs, while 40% of the Russell 2,000 is down over 20% this year – Which index do you think is being manipulated?
- Over the past 12 months, stock buy-back programs have grown by 30% to an incredible $550 Billion. The sole purpose of a stock buy-back is to push the stock price higher – so that corporate executives can cash-in their stock options at inflated prices. So far this year – less than 7,000 corporate ‘insiders’ have PURCHASED any stock in their own companies while over 23,000 ‘insiders’ have SOLD stock in their own companies.
- For the first time in history, volume in WEEKLY SPX options has eclipsed the MONTHLY volume. This tells us that ‘trading horizons’ are continuing to shorten.
- France and Germany are showing a noticeable slowdown in their economies. Maybe the European markets have a) Taken a hit because the U.S. market took a hit, b) Are taking a hit over their lousy economic policies (Russian sanctions), and/or c) Are using the ‘air strikes’ as a good excuse to ‘lighten-up’ on activities and positions.
- Finally, Goldman Sachs Asset Management predicts that Treasury 10-year yields will climb to their highest levels in four years – as the FED ends its bond-buying program, and weighs the first interest-rate increase since 2006. In fact, they are suggesting that 10-year rates could rise to 4%. Honestly, if rates move from the current 2.5% to 4% - you will see a ‘blow-up’ like no other. Everyone has priced in debt at 2.5%, and a rise of 1.5% (a 60% increase) would bring out a whole new swarm of ‘Lehman Brothers’ catastrophes.
Just this week a server in a restaurant recommended a stock to me. That reminded me of a story: In the 1920’s, J.P. Morgan arrived bright ‘n early at the Stock Exchange – like he did every morning. On this particular morning the shoeshine boy gave Mr. Morgan a stock tip. When Mr. Morgan entered the exchange he told all of his staff to SELL everything, and to ‘short’ the market. When they asked why, he said: “The shoeshine boy just gave me a stock tip.” His staff seemed baffled by his response. Mr. Morgan then said: “If the shoeshine boy is advising and buying stocks, there is no one left that is NOT buying; therefore, without any more buyers – it’s TIME to SELL.” What followed was the Great Depression. Welcome to October!
If we take a look at the various markets and sectors:
- The DAX (in Germany) is grinding lower.
- The Euro Stock 50 (European index) is holding up better than the DAX – but not by much.
- The NASDAQ (NDX) had a respectable retracement bounce on Friday – admittedly on half volume, and the battle that is brewing is whether we can close above the trend line and re-test the highs – OR obey the existing trend line and keep going lower. In either case, I think we obey the 4,000 to 4,100 range for this week.
- The S&P’s (SPX) are still in a down-trend, and unless it breaks it’s trend line to the upside – we’re going to continue to grind lower. 1,960 is the first level of support on a drop, and 1,940 is the lower bound. If we get a little consolidation, we could get a bounce in here and start forming the second shoulder into the mid-term elections.
- The Russell (RUT) – the small-cap stock index – is by far the weakest index. To regain my faith in the overall economy, the Russell 2,000 (RUT) needs to find support here, and start rallying.
- The Financials (XLF) are somewhat ‘hanging out’ here – neither leading or lagging the market.
- The Energy Sector (XLE) has been decimated, but on Friday it changed momentum and could begin to move higher this week.
- Bonds (TLT) held up nicely on Friday (despite the market rally later in the day), and proved that this is a good hedge for the stock market.
- The VIX (VIX) is in a ‘squeeze’, and when this happens stocks often sell off significantly. The VIX is still in the 15-range, and I suspect it will stay in here as we consolidate this week.
As far as the overall market, there are a lot of variables coming on the horizon. Next week we will be watching for more market reaction from this week’s roller coaster, and from the Non-Farm Payrolls Labor Report that is due out on Friday. I think that we will continue to see the tug of war between the bulls and the bears with (at least early in the week) the bears winning as we grind lower in ‘sell-off’ mode.
My current list of potential candidates this week is starting to grow again. On the radar are the indexes: RUT, SPX, NDX, and the stocks: FB, GILD, IG, RARE, and INSY are my longs, with NFLX, VMW and TSLA being my top ‘shorting’ candidates. I continue to sell 1+ standard deviation PCS’s (Put Credit Spreads) and CCS’s (Call Credit Spreads) on the NDX, SPX and RUT – because selling those are somewhat agnostic to market direction. If the weekly market direction is ‘UP’ – I sell more Call Credit Spreads, if it’s ‘DOWN’ – I sell more Put Credit Spreads.
My current short-term holds are:
- FEYE (Cyber-Sec) – in @ $28.76 – (currently $31.98),
- KO (Beverage) – in @ $41.17 – (currently $42.20),
- LNG (Energy) – in @ $57.40 – (currently $80.14), and
My Small Caps (earned 19.73% in the month of August):
- LNGLF (Energy) – in @ $3.54 – (currently $3.68),
- IG – in @ $7.27 – (currently $9.23),
- VDSI (Cyber-Sec) – in @ $14.17 – (currently $18.90), and
- INSY – in @ $35.14 – (currently $38.16).
To follow me on Twitter and 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.
Remember the Blog: <http://>
Until next week – be safe.