This Week in Barrons – 2-22-2015:
"In Greece, Wise men speak – Fools decide" … George Santayana
Dear Ms. Yellen:
As the story goes, Bobby Fisher (the chess grandmaster pictured above in his match with Boris Spassky) could think 12 moves ahead of his opponent. As of this moment, I think Greece is having trouble thinking one move ahead of the ECB. My attempt to simplify the negotiations:
- GR Move #1 = The Syriza Party (a far-left Socialist group) recently gained control of Greece, and (up until last week) threatened to exit the Euro (which amounts to a full default on their loan obligations) in exchange for more bailout money.
- ECB Move #1 = The ECB reacted by eliminating Greece’s ability to use their own Greek bonds as collateral for any loans. This forced a temporary stalemate between Greece and Europe.
- GR Move #2 = Then Greece offered some concessions to its previous stance, and pledged to work with the ECB as long as Greece was paid an ‘additional’ $270 billion dollar in bailout funds.
- ECB Move #2 = Germany (being nobody’s fool) rejected Greece’s application out of hand and issued a statement: “The Syriza Party threatens to leave the Eurozone, default on all of its debts, end austerity in Greece – AND expects Europe to give them $100’s of billions to do so?” They went on further to explain that Greece was never serious about fiscal responsibility, and blames everyone else for all of the debt that they have created.
- GR Move #3 = The Greek people have elected Socialism. Unfortunately Socialism requires money to survive, and the only one giving Greece money is Europe. Therefore, on Friday the Greeks accepted a 4-month extension of their existing loan agreement with NO NEW terms, and conceded some important elements.
- ECB Move #3 = You don’t have to be a chess grandmaster to see how this game plays out.
None of the above changes the fact that the world is dead broke, and in debt all the way up to our receding hairlines. There is no mathematical way out of our collective economic condition. Ms. Yellen, you either have to continue creating new money and debt out of thin air forever, or there has to be a gigantic ‘reset’ button. History shows us that there are only two solutions out of hopeless debt. The first is massive default, and the second is war. Ms. Yellen, if you’re thinking 12 moves ahead, which move do you see coming first?
- The ceasefire in the Ukraine is not holding, but no one wants to admit it.
- This week’s oil inventory report showed an incredible oil surplus. With nobody cutting production, what happens in a month or two when we fill up all of the oil storage containers?
- Global shipping is at a standstill, as the Baltic Dry Index is close to historical lows.
- The Philly FED’s February Manufacturing survey fell for the 3rd consecutive month.
- Baker Hughes reported that the number of rigs actively drilling for oil and natural gas in the U.S. is down by 30% (406 rigs) from a year ago.
- Mortgage applications were down 13%.
Several weeks back, I wrote of the lack of ‘skilled’ workers in the U.S. This week Georgetown University’s Center on Education and the Workforce came out with a study showing that not all college majors are ‘created equal’. The unemployment rate for recent college graduates varies wildly, depending upon the bachelor’s degree. The lowest bachelor’s degree unemployment rates are for: education (2.4%), then biology and life sciences (2.6%), followed by healthcare (2.7%), engineering (2.8%) and then computers, statistics and mathematics (3.5%). The highest unemployment rates are for architecture (10.3%), social sciences (10.1%), psychology and social work (9%), law and public policy (8.6%), humanities and liberal arts (8.4%), and followed by communication and journalism (8.2%). The report is also quick to point out that it’s really what you GET for your money. After all, college graduates are carrying over $1.2 trillion in debt. The good news is that recent college graduates have an average starting wage premium of 140% over those with only a high school diploma. But that’s not the same for every major. Recent college graduates who major in the arts, psychology, and social work earn an average of $31,000 a year – only $1,000 more than the average high school-educated worker. However, those majoring in engineering earn (on average) $57,000 a year, almost twice as much as high school graduates.
As for the markets, Friday had every chance to be a long boring grinding session. After the 100 point morning decline, the news hit about a potential ECB / Greek deal. And (on the surface) the ECB and the Greeks had agreed to a 4-month loan extension in exchange for Greece giving up many ‘non-negotiable rights’. So what happens now? The Greeks have until early this week to ‘make it official’. If the agreement is signed, realize we will have to go through this same nightmare again in 4 months.
With that news event as a driver, the DOW joined the S&P on Friday in making all-time new highs. This week (along with the Greek decision) we have a two-day Fed meeting that will culminate in a Ms. Yellen press conference. Due to both of these events occurring in the same week, I am safe in predicting that this market could go ‘big’ in either direction. For example:
- If the Greek deal is off and its citizens are rioting – then we will lose those new market highs quickly.
- If the Greeks ratify the deal, and the FED stays dovish about not raising rates too quickly – then the market could add a few hundred points in short order.
- And if the Greeks ratify the deal, but Ms. Yellen talks a little tougher about raising rates – then we could trade sideways and choppy.
So for this week we are trading day-to-day. The market has made new highs; let’s see if the market can hold onto them.
J.P. Morgan (JPM) and Facebook (FB) both pinned for us on Friday – creating quite a windfall. This means that based upon the market direction, option buying volume, etc. – that JPM and FB both ended the day exactly on the share prices that I had predicted. Congrats to all of you who were with me on those two trades.
Below is a chart of the ‘technicals’ for the up-coming week:
A couple thoughts for next week:
- Dominion Resources (D) – looking at buying the MAR +72.5/-77.5 Call Debit Spread,
- 3-D Printing (DDD) – looking at buying the MAR +30/-28 Put Debit Spread,
- Dr. Pepper (DPS) – looking at buying the MAR +75/-80 Call Debit Spread,
- Amgen (AMGN) – looking at selling the MAR -145/+140 Put Credit Spread
- Nike (NKE) – as earnings are coming up in March, I’m looking for a move higher,
- Devon Energy (DVN) and Marathon Oil (MRO) – as energy finds a bottom, a move higher could be in the cards, and
- FDX (FDX) – as this stock lies dormant – the idea of selling an Iron Condor is intriguing.
I’m still using the market volatility to sell into, and I wouldn’t be surprised to see a market pull back early in the week due to the market’s irrational exuberance surrounding the Greek situation on Friday. Some of my holdings going into the week are as follows:
- CF – MAR – BUY the +310/-315/+325 Call Butterfly, along with the +280/-290/+295 Put Butterfly – both for Credits. That’s right – you will ‘get paid’ for buying this pair,
- IBB – MAR – BUY the +345/-350/+360 Call Butterfly, along with the +300/-310/+315 Put Butterfly – again both for Credits. Again getting paid for buying this pair,
- KR – MAR – BUY the +72.5/-75/+80 Call Butterfly,
- CP – MAR – SELL the +170/-175 to -200/+210 Iron Condor,
- RUT – MAR – SELL the +1040/-1050 to -1270/+1280 Iron Condor,
- RUT – MAR – BUY the +1130 / -1200 / +1260 Call Butterfly,
- SPX – MAR – SELL the +2050/-2055 to -2125/+2130 Iron Condor
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.