This Week in Barrons – 1-11-2015:
“Just when you have all the answers – I change the questions”… Rowdy Roddy Piper
Dear Ms. Yellen:
As I understand it, the game plan was to: a) lower interest rates and increase the money supply, b) this would spur borrowing, c) then borrowing would spur spending, d) spending would boost revenues and profits, and e) increased revenues and profits would boost job hiring. The theory was that this would create a weaker dollar – which would also help to increase exports and more U.S. manufacturing jobs. With a bonus being that the weaker dollar would allow us to repay our debts with a devalued currency. The weak dollar would also make U.S. real estate attractive to international buyers. However, every other nation also devalued their currency making the U.S. dollar the strongest horse in a very week race. Isn’t this strong U.S. dollar working against you? I remember from your writings that a strong dollar increases the risk of deflation, which causes recessions and economic stagnation to a nation. So how far will you allow the dollar to rally before you take action? Will you (if the dollar remains strong) continue with your zero interest rate policy (ZIRP) and perhaps launch another QE program?
Ms. Yellen, you obviously knew that the other Central banks (Japan and Europe) would launch huge QE programs of their own. And by now you must have heard The Ben Bernanke’s quote from last week – when in the U.K. he said: “See, we did it. We solved the nation's problems". But to quote the great WWF hero - Rowdy Roddy Piper: “Just when you have all the answers, I change the questions.” I’m guessing that you were surprised by the strength of the strong dollar, and you’re only recourse (now) is to continue to talk ‘up’ how good things are, and then increase interest rates by a small amount in late 2nd quarter. I do NOT think that you will introduce any new QE. I do (however) think that you will look for any event on which to blame our weak economy and reinstitute a new QE program. Right now, that event seems to reside in the Ukraine.
Ms. Yellen, it’s my guess that the U.S. will try and lure Russia into a confrontation in the Ukraine. Russia will generate a response large enough to make a major newspaper headline. Our response will be that Putin’s a madman, hell bent on taking over Europe, and therefore, we will be forced to build more jets, bombs, nukes, and high ticket defense items. This political reaction will give the FED the opportunity to institute a new QE program due to: war fears, defense spending, and a sagging economy. At that point you may even ‘take back’ the rate hike that you gave us before this all happened. I think that you will accept virtually anything big that goes ‘bump in the night’ as a reason to come up with more stimulus and thereby weaken the dollar.
That’s my 2 cents.
- The ISM Services Index and the Factory Orders Report were both lower than expectations,
- The Prices Paid Index fell to levels not seen since 2009.
- Oil continued to fall, and fall hard,
- The Baltic Dry Index (a measure of the shipping industry’s health) continued to fall,
- Global bonds continued to trade below zero yield (negative interest rates),
- Greece is on the rocks,
- The Eurozone is being rocked by the sanctions placed on Russia,
- And even China announced about a Trillion dollars of infrastructure spending to try and boost their economy.
On Friday we had the monthly Jobs Report. The headline told us that our Unemployment Rate fell more than expected to 5.6%, and that we created 252,000 jobs in December. On the surface this appeared like a great report, but the markets fell. So let’s dissect the report a bit:
- Average Hourly Wages fell 0.2%, and over 273,000 people dropped OUT of the labor force in December.
- This lowered the Labor Participation Rate to 62.7% - a level not in almost 40 years.
- Doing the Math: 246,000 NEW jobs were created, but 273,000 people dropped out of the workforce = creating a net LOSS of 27,000 individuals.
- Factually: 6.75M people have LEFT the workforce since 2008.
- If we ADD back the 6.75M people who have left the workforce (and count them as being unemployed), the unemployment rate becomes 9.5%.
- So the REAL unemployment rate is 9.5%, which is a ‘far cry’ from the headline report of 5.6%.
- So, THAT is the reason for the market decline following the jobs report on Friday.
Our markets are being propped up by Central Banks that have purchased over $29T worth of stocks. We are (however) beginning to see cracks: (a) In 2014, the longest losing streak for stocks was 3 days. In 2015, we’ve already had a 5-day losing streak. And (b) the S&P has not suffered a 1.5%+ down day during the first week of a year since 2001. We broke that record in 2015. This market has been so ‘bizarre’ for so long, it’s finally getting ‘back to normal’. For example, during 12 days in December the market moved almost 2,000 poionts. And in January, we lost 452 points in 3 sessions, and then proceeded to gain back 533 points in two other sessions.
We are all witness to computer driven, algo-trading gone wild. However, I’m noticing that the algorithms are ‘volume-biased’ to SELL harder than they BUY. In other words, on the bad ‘down’ days the volume is usually really strong, but on the up days the volume is normally weak. How can this be? Well, when the selling hits, it is on fairly good volume, and when the selling is over it doesn’t take too much buying to produce oversized moves. This is an indication of a ‘troubled’ market.
This week marks the beginning of earnings season. A company’s ability to ‘fudge’ their numbers will be the determining factor as to whether this market kicks into high gear and rallies, or if this choppy consolidation breaks to the downside. To support a market at these nosebleed levels, earnings would normally have to be spectacular. But in our current FED, QE, Japan carry trade, and zero interest rate policy environment earnings could stink and we could still go higher. How? A mere mention by a FED official that they won’t raise rates, or Mr. Draghi (in Europe) passing a giant QE program would ignite this market.
I do NOT think we're past the extreme volatility. Between trying to game the earnings season, guessing what the EU might do concerning Greece and QE, and guessing what our own FED will do – we are going to see more chop. The tug-of-war between those wanting out of the market and those wanting in – will continue. Right now, it feels like we have a better chance at fading lower, but that could change in an instant if companies start telling us how wonderful things are.
Volatility is here in a BIG way. Intra-day swings are adding up to 500 point moves. There’s a big push between those that know the economy is a fraud, and those that toe the Wall Street line and see the U.S. as a shining beacon of strength. Some want out, some want in, and that is causing this entire chop.
My current list of potential candidates for this week is as follows: Gilead Pharmaceutical (GILD), Russell Small-Cap Index (RUT), Bio-Tech Index (IBB), S&P Index (SPX), Nasdaq Index (NDX), Costco (COST), Restoration Hardware (RH), Starbucks (SBUX), Nordstrom’s (NORD), Amgen (AMGN), Kroger (KR), Celgene (CELG), and Disney (DIS).
For next week I’m selling into this increased volatility using Iron Condors, and by using a specific stock’s bias via Put Credit Spreads (PCS) and Call Credit Spreads (CCS) – and playing the other side with a Broken-wing Butterfly.
- AMZN – JAN5 – SELL the +245/-250 to -350/+355 Iron Condor for $0.62,
- GILD – JAN – SELL the +90/-91 PCS – and BUY the +94 / -99 / +102 Call Butterfly, there is an upside ‘weekly squeeze’ in place,
- IBB – JAN – SELL the +297.5/-300 PCS – and BUY the +307.5 / -315 / +320 Call Butterfly, there is an upside ‘4-hour squeeze’ forming,
- IBB – FEB – BUY the 310 / 320 / 335 Call Broken Wing Butterfly,
- LULU – JAN – SELL the +53/-55 PCS – and BUY the +58 / -60 / +61 Call Butterfly, there is an upside ‘Daily squeeze’,
- PFE – FEB – SELL the 30 / 31 PCS – and BUY the 32 / 34 / 35 Call Butterfly, there are 30-min, 1-hour, and Daily squeezes forming,
- RUT – MAR – SELL the +1040/-1050 to -1290/+1300 Iron Condor,
- SBUZ – FEB – BUY the 80 / 85 / 90 Call Butterfly,
- BABA – JAN – BUY the 90 / 97.5 / 105 Put Butterfly (playing the downside),
- NFLX – JAN – BUY the 290 / 300 / 310 Put Butterfly (playing the downside), and
- TLT – BUY in the 125 to 126.5 zone.
- UNH as it approaches my buy zone of $101.54,
- DPZ as it approaches my buy zone of $96.60, and
- PZZA as it approaches my buy zone of $58.28.
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.