“Today’s Euro/QE announcement has come far too late and is akin to applying a defibrillator to a dead monkey.” Andrew Wilson, Towry Head of Investment
Dear Ms. Yellen:
Ms. Yellen, ‘Hyper-Interventionism’ is when a government tries to change, bend, or control the laws of supply and demand. Quantitative easing (QE), price fixing, pegging currencies, and subsidies to offset trade imbalances are all methods of trying to control supply and demand. But as time passes (just like with a drug addict), more and more effort and resources are required to keep the hyper-interventionism effective. This week we saw what happened to the Swiss Franc when the Swiss National Bank (SNB) stopped their hyper-interventionism, and in minutes their currency rocketed 15% and their stock market crashed. Ms. Yellen, I wonder what would happen if you really stopped the FED’s hyper—interventionism in the U.S.?
Your next FED meeting is January 27 and 28th. I’m seeing:
- The dollar index continuing to rally,
- The EU doing ‘major-league’ QE,
- The Swiss unpegging their currency,
- The job market beginning to deteriorate,
- Wage growth continuing to stagnate, and
- The stock markets maintaining their rally.
Now, I think you’re going to attempt to talk the dollar down by being dovish in your remarks. That’s especially true given Mr. Plosser and Mr. Fisher (the only remaining ‘hawks’) are no longer voting members on the board. With only doves and staunch Keynesian economists on your board, you will most certainly lean toward more accommodation with your main fear being deflation. But history shows that inflation can come on suddenly – just look how far the Swiss Franc moved (15%) in minutes.
Ms. Yellen, is it just me, or is every nation in a race to destroy their own currency? The idea of slashing deposit interest rates to the bone is being implemented on a scale I’ve never before seen. I’d be curious to hear how you see this ending smoothly – without extensive collateral damage. I see this coming to a crashing halt right around the time of the next presidential election.
Factually this week:
- Johnson & Johnson reported reduced year-over-year revenues, and (by GAAP standards) missing earnings by a mile.
- UPS warned on earnings due to a ‘weak’ U.S. market.
- McDonalds missed both top-line revenues and bottom-line earnings.
- eBay beat earnings by a penny, but had to buy back $1.2B of their own stock and lay off 2,400 workers to do it.
- U.S. Steel laid-off another 545 people (over the 1,300 previously announced) along with idling production facilities.
- John Deere announced an additional 900 lay-offs.
- China’s growth has slowed to a 24-year low, and U.S. manufacturing growth slowed to a 1 year low.
- The International Monetary Fund dropped their global growth outlook.
- Existing year-over-year home sales dropped for the first time in 5 years.
- On Thursday, Mr. Draghi announced a 1T Euro QE package consisting of 60B Euros a month until September 2016 – or longer.
- The Euro is in ‘free fall’ since Draghi went ‘all in’ for QE.
- Canada, Denmark, India, Switzerland and a handful of others have all cut their interest rates in response to European QE.
- Russia and China signed a $250B dollar high-speed rail pact – linking Moscow and Beijing by train.
- The Bank of Japan bought $5.6B worth of foreign stock last week.
- Since Obama’s State of the Union speech, we have seen over 32,000 announced job cuts.
For years the gold and silver bugs have been splattered all over the windshield. I’ve gone on record as saying that gold is not down because the world is rosy and no one wants it. Gold is lower because it has been manipulated downward. The Central Banks did NOT want gold competing with fiat currencies. China accumulated over $1T in U.S. Treasuries. When we were doing QE (devaluing our currency) we traded China ‘less expensive gold’ for not ‘dumping’ our Treasuries. But the other part of the Chinese situation is that they are adamant about being recognized as one of the world’s leading economies. They knew that if they could amass enough gold to ‘back’ their currency, then they would have a good chance of having their currency (Yuan) included in the weightings for the International Monetary Fund’s Special Drawing Rights (SDRs) – being held in September 2015. So we kept a lid on the price of gold while the dollar was falling, thereby allowing China to purchase what gold they needed (at reduced prices) in order for the Yuan to be included in the SDR discussions. That is why gold has been taken down and capped for the last 4 years.
The IMF will rebalance their SDRs this fall. China will prove that it has accumulated between 2.5% and 3% of its GDP in gold, and the Yuan will then be included in the SDR weighting. It is at this point that the cap on the price of gold will be removed. Why? Because once China has their needed amount of gold and is in the SDR, they will no longer want the price of gold to be capped and will gladly allow gold to go to $2,500, $3,000 or more. So, does China have enough gold? Judging by the way gold is acting I have to say that we are darned close to seeing the bottom in both gold and silver. I'd like to believe that 2015 would mark the end of their manipulation, and I won't be surprised if I see both of them meet and beat their old highs next year.
The following chart shows some technical predictions concerning various currencies: Euro versus U.S. Dollar, British Pound versus U.S. Dollar, U.S. Dollar versus the Japanese Yen, along with technical predictions for the S&P and DOW averages. It’s telling you to think strongly about buying PUTS on the FXE (the EURO ETF), and about buying PUTS on the FXY (the Japanese Yen ETF).
Right now the S&P is in a bit of a tight box between its 50-day moving average of 2,046, and its double top of 2,064. I’m not going to add to any directional positions until the S&P goes over 2,064, and I won't take profits until the S&P closes under 2,046. Also remember, we are in the middle of earnings season, with a lot of really big names declaring earnings this week. Our markets could easily pop to the upside for 100 points on the heels of a good earnings beat, and then fall for another 200 on a couple ugly reports. This volatility will only be resolved by patience. Keep an eye on the precious metals over the next several weeks as I think there will be some interesting plays setting up.
The following is a list of ‘short’ ETF’s that you could take advantage of if the market ‘goes south.’ So if you sense the market ‘tanking’ – think about putting some money into:
TZA = Russell 2000 3X Short / VOL = 61%
TWM = Russell 2000 2X Short / VOL = 40%
FAZ = Financials 3X Short / VOL = 50%
SKF = Financials 2X Short / VOL = 27%
EDZ = Emerging Markets 3X Short / VOL = 55%
EEV = Emerging Markets 2X Short / VOL = 40%
NUGT = Precious Metal Miners 3X Long / VOL = 130%
DUST = Precious Metal Miners 3X Short / VOL = 133%
DUG = Oil & Gas 2X Short / VOL = 50%
DIG = Oil & Gas 2X Long / VOL = 53%
SQQQ = QQQ 3X Short / VOL = 49%
DXD = DOW 2X Short / VOL = 30%
QID = QQQ 2X Short / VOL = 33%
SDS = SP500 2X Short / VOL = 33%
SCO = Oil 2X Short / VOL = 109%
ERY = Energy 3X Short / VOL = 79%
I’m looking to sell iron condors on the indexes, buy strong stocks on pullbacks, and sell weak stocks into rallies. I’m looking toward:
- Priceline (PCLN) – to sell a Call Credit Spread,
- Tesla (TSLA) – to sell a Call Credit Spread,
- RUT – to sell an Iron Condor,
- IWM – to sell an Iron Condor,
- Chipotle (CMG) – to sell a Put Credit Spread,
- Facebook (FB) – to buy a Call Debit Spread,
- Apple (AAPL) – to buy a Call Debit Spread,
- Lumber Liquidators (LL) – to buy a Call Debit Spread,
- Johnson & Johnson (JNJ) – to buy a Call Debit Spread,
- Amgen (AMGN) – to sell a Put Credit Spread after earnings,
- UPS (UPS),
- Timkin (TKR),
- 3-D (DDD), and
- The Energy Sector ETF (XLE).
For next week I’m mainly selling premium into this volatility with:
- AMZN – JAN5 – SELL the +245/-250 to -350/+355 Iron Condor – taking this off on Thursday AM before earnings,
- GILD – JAN5 – SELL the +89/-90 PCS – cashing this in before earnings,
- AAPL – MAR – SELL the +95/-100 PCS,
- AAL – SELL the 45 / 47 PCS – and BUY the 52.5 / 55 / 60 Call Butterfly,
- RUT – MAR – SELL the +1040/-1050 to -1290/+1300 Iron Condor,
- RH – FEB / MAR – BUY 94 Calendar,
- UPS = JAN5 = 101 / 103 / 104 PUT Broken Wing Butterfly,
- SPX – FEB – SELL the 1870 / 1870 PCS, and
- TLT – BUY in the 125 to 126.5 zone.
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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