This Week in Barrons – 3-29-2015:
Thoughts:
This is a weekend where:
- The Ukraine is receiving more and more arms shipments,
- If Greece exits the Euro – no one would be surprised,
- In Yemen, bombs are falling and ‘boots’ are on their border,
- Saudi religious leaders are calling for the destruction of churches,
- U.S. and Israeli tensions are heating up over Iran’s nuclear plans, and
- In 2015, U.S. stock funds have seen the largest outflows since 2009.
Congratulations to China are in order, as it appears that the IMF (International Monetary Fund) will add the Chinese Yuan into its global Forex benchmark basket of currencies. Strategists at Bank of America Merrill Lynch believe that the IMF will vote this October to include the Yuan as one of the units that make up the Fund's "Special Drawing Rights" (SDR), a ‘pseudo’ meta-currency used in IMF transactions.
This will inch the world ever closer to creating a system of trade and transactions that are not governed by the U.S. and the U.S. dollar. This is the reason for the BRICS's bank, and the Chinese Infrastructure Alliance bank. Once these competitive banking arrangements and accompanying transaction processing systems are in place, you will see nations fleeing from the U.S. dollar. The U.S. dollar's ‘dictatorship’ days are indeed numbered.
The U.S. is trying desperately to avoid losing its economic supremacy, as nation after nation is signing-on with the Chinese Infrastructure Alliance bank. Just think about a Russian - Chinese alliance. Russia is one nation where the U.S. holds no real ‘sway’ over its economy, military or its people. And likewise, Russia does not rely on the U.S. to buy its goods and services. Marrying Russia’s natural resources, food production, and military technology with the Chinese population and manufacturing abilities – is a ‘tag team’ that sends shivers down the U.S. government’s spine.
Recently the Dollar has surged, and has some people taking that as a sign of our economy being strong. In my opinion, that is completely wrong. The U.S. dollar isn't based upon anything other than its relationship to other currencies. So if the Euro goes down, then the dollar goes up. It’s like being the best looking horse in a glue factory – because the entire system is about to change.
With the Chinese going into the SDR basket, some of the ‘price-caps’ on gold will be released. That’s not to say gold will go crazy, but it won’t be held down as much as when China was in accumulation mode. This will give the dollar yet another currency war competitor. And as the dollar falls from grace, there will be inflation, shortages, and bank outages – nothing permanent but certainly disruptive. I think that these disruptions will be worse than the 2008 financial crisis. Has such a disruption occurred in the past? Yes. In 1933 the U.S. Government issued Executive Order 6102 – that made everyone turn in his or her gold. On April 5th 1933, President Franklin D. Roosevelt signed the executive order: “forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States". This order criminalized the possession of monetary gold by any individual, partnership, association or corporation.
To say this was a shock to the system is an understatement. With the swipe of a pen, people were forced to turn over any and all gold that they had in their possession. In return, people were given paper money. This was an economic ‘reset’ event. So huge ‘resets’ have occurred in the past, and it's my belief that we are about to witness another one. In coming weeks, I will discuss what to do about these events, and how you can protect yourself.
The Market:
The market moved lower this week for two (less-than-obvious) reasons:
- One, any time a market sets an all-time high level – that level becomes resistance (a ceiling) for the next time the market tries to move higher.
- Two, we are in a ‘buy-back blackout’ period. The buy-back rules forbid a company from buying back any of it’s own stock within 5 weeks of an earnings report. Given we’re coming into earnings season, and considering that stock buy-backs are the single largest boost to this market – a lack of companies gobbling up their own stock leaves a major vacuum of buyers in this market.
Two other specific events caught my eye this week:
- One, on Wednesday the market started falling dramatically as soon as the SEC passed the ruling subjecting high frequency trading (HFT) firms to more advanced Financial Industry Regulatory Authority (FINRA) regulations.
- Two, U.S. oil inventories increased by 8 million barrels this week. Which means that at our current rates of production and usage have about 2 months of storage remaining. After 2 months, all of the options for storing oil will be exhausted. What happens when all of the available storage options are gone? Experts say that either (a) oil production will grind to a halt, or (b) oil companies will push the price so low, that it will cause massive buying. Only time will tell.
As we come to the end of the first quarter, this week was a terrible week for bulls. The DOW and S&P fell for 4 straight days, and then had an anemic gain on Friday. In this first quarter, approximately 52 out of 60 economic reports missed their estimates to the downside. The Atlanta FED even told us their estimate for 1st Quarter GDP will be around 0.3%, and that about half of that came from people being forced to buy Obama-care. This begs the question: Has the market ‘topped’, and should we prepare for a long, slow grind lower?
I think the autumn of 2015 could be an interesting time, and that it wouldn't be unusual for the market to start fading 6 months in advance of a rough patch. Historically, this coming week often ends positively. And considering that this is a holiday shortened week – that should add even more credence to an upside bias. Therefore, I have no problem thinking that we put in a bounce this week, but here’s the catch:
- The market set a previous high of 18,288 on March 3rd.
- We then moved down to 17,635.
- Buyers came in and bounced the market to 18,127 – before rolling lower again.
- If we don't see the market bounce over that close of 18,127, then a pattern of ‘lower highs’ will be in place, and that is NOT a bullish sign.
I'm leaning long this week, but pay attention to the high. If we close lower than 18,127 on the DOW, I may have to start considering that this market run is over, and that this market is destined to start working its way lower.
TIPS:
The DOW and the S&P have gone negative for the year, and this is only the fourth time in the past 20 years that this has happened. I think in the next several weeks we will get more and more chop as we enter earnings season. Next week we have the non-farm payrolls report, along with the markets being closed on Friday.
In terms of recommendations:
- WGO (Winnebago) had poor earnings this week, and is a strong candidate for selling a Put Credit Spread. Remember, in times of high volatility – you want to be ‘selling’ premium not buying it.
- Other candidates for selling Put Credit Spreads are: CNI (Canadian National Railroad), and PRU (Prudential Insurance Company).
- DIS (Disney) should be moving higher in the coming weeks.
- HERO (Hercules Offshore Inc.) is potentially poised to go out of business. It is currently trading at $0.14 – so please be careful if you’re playing this to the long side.
- ORCL (Oracle) moving higher is interesting to me. I would buy a MAY / JUNE $45 Call Calendar for $0.40. I would allow the $45 May Call to expire worthless, leaving only the June $45 Call with a small cost basis. I would then sell the June $46 Call against our June $45 Call for potentially $1.00 – pocketing the $0.90 profit.
- SAM (Boston Beer Company) I like to the upside, and am looking at Sell the May +220 / -230 Put Credit Spread.
I’m currently holding:
- AAPL – SOLD APR Iron Condor: + 119 / - 121 to -131 / + 133
- GILD – BOUGHT APR Call Butterfly: +100 / -105 / +110
- FB – BOUGHT APR – Call Debit Spread: +80 / -90
- KR – BOUGHT APR – Call Butterfly: +75 / -77.5 / -80
- LL – SOLD APR – Put Credit Spread: -30 / +28, then SOLD APR – Call Credit Spread: -35 / +40
- SPX – SOLD APR – Iron Condor: +2010 / -2015 to -2160 / +2165
- SYK – SOLD APR – Put Credit Spread: +85 / -87.5 and Buy Butterfly: +95 / -97.5 / +100
- URI – SOLD APR – Iron Condor: +80 / -82.5 to -95 / +97.5
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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