RF's Financial News: May 2015

Sunday, May 31, 2015

This Week in Barrons - 5-31-2015

This Week in Barrons – 5-31-2015:

Thoughts:

Dear Ms. Yellen:

How is it that we arrest FIFA (soccer) leaders, and let our bankers slide? How is it that our bankers can rape us for Trillions of dollars in mortgage fraud, Libor fixing, currency fixing, gold and silver manipulation, pay $40 billion in fines, and not a single high ranking banker goes to jail. Yet somehow the FBI can arrest 14 FIFA soccer heads for millions in corruption and graft? How is it that ‘Deflate-Gate’ (the New England Patriots letting the air out of footballs), can get 24/7 media attention for weeks on end, yet few reports were ever shown on the nightly news about the billions banks have been fined?

We are becoming a bi-polar (and potentially hateful) society. On Friday there was an incident on a United Airlines (UAL) flight going from Chicago to Washington D.C. Tahera Ahmad (a 31-year-old, female, Muslim chaplain and director of interfaith engagement at Northwestern University) was on this flight – heading for a conference promoting a dialogue between Israeli and Palestinian youth. For hygienic reasons she asked for an unopened can of soda. The flight attendant told her that she could not give her one, but proceeded to hand an unopened can of beer to a man seated nearby. Ahmad questioned the flight attendant, and her response was: "We are unauthorized to give unopened cans to people because they may use them as weapons on the plane." When Ahmad pointed out the discrimination (giving the man the unopened can of beer, but not her an unopened can of soda) the attendant said: “It's so YOU don't use it as a weapon.” Ahmad then asked the other passengers if they had seen what had just happened, and the man (sitting across the aisle) turned to her and yelled: "You Muslim, you need to shut the f--- up." Ahmad replied: “What?” And the man leaned over, looked her in the eyes and said: "Yes, you know you would use it as a weapon. So shut the f--- up."

Combine this ‘mood-swingesque’ behavior with Marco Rubio (a Republican Congressman from Florida and a candidate for President of the United States in 2016) being interviewed by CNN on Tuesday saying: “In America today, if you do not support homosexual marriage, you are labeled a homophobe and a hater. The next step is to argue that the teachings of mainstream Christianity (because they do not recognize homosexuality) constitute hate speech.” Really Mr. Rubio, United Airlines, and the FBI – is there no middle ground on any of these topics? FBI – can’t we prosecute ‘any’ bankers? United Airlines – can’t we uniformly enforce a rule rather than racially enforce one? Mr. Rubio – I realize you’re trailing Ms. Clinton, but do you really want to include religion in your Presidential platform?

It’s no secret that I'm on record suggesting that some form of economic collapse/reset is coming to the U.S. I'm also on record saying that you should (at minimum) learn the basics of defense, and prepare for some societal upheavals and/or tough times. The facts are, in 1980, the U.S. was the creditor to the world, and today we are the biggest debtor the world ever created. Of the 30 industrialized nations:

- Our student's rank 27th in math, and 20th in science.

- We are LAST in life expectancy.

- We are FIRST in first-day infant mortality.

- We have the 7th highest cancer rate in the world.

- And we rank 21st in high school graduation.

Just 20 years ago the U.S. was the ‘engine’ driving all of the good categories, and now we’re the ‘caboose’. The behind the scenes efforts to remove the U.S. from being ‘top of the hill’ were masterful because: (a) they’re succeeding, and (b) because nobody notices or cares. We are too busy watching a Kardashian’s butt.

When I see things such as Christianity being accused of hate speech by a Presidential candidate, teachers being taught to ignore horrible behavior because ‘it's in their culture’, or behavior discrimination due to someone’s last name – do you really think that currency resets are that far behind? As we jail our soccer leaders for Millions in fraud, yet allow our bankers to run free for Trillions in theft, deception and manipulation – do you really not see the shift in power from West to East? Keep these elements in mind as I suggest that the U.S. economy is going to go through some rough patches, because as sure as the sun rises, you will NOT hear about it on your nightly news.

The Market:

Factually:

- U.S. Corporate 1^st Quarter profits sank 5.9% - the largest drop since 2009.

- Consumer sentiment FELL in May to a six-month low.

- 1^st Quarter GDP was revised to a NEGATIVE 0.7%. Yes, despite all the trillions of injected dollars pushing the market higher, despite all of the gimmicks and manipulations, our economy still contracted. And that’s including a NEW GDP calculation that was modified to make it look better. The real number was closer to a NEGATIVE 3.5%.

Are stocks supposed to be making all time highs when corporate profits are falling and GDP is negative? No. But in this Central Banker controlled casino virtually anything goes. Next week we get a plethora of economic news, from Greece to ISM to the jobs report. These reports will mostly likely not be ‘wonderful’ so the thinking is that this data will keep the FED from raising rates. Consider this: the FED didn't raise rates in the first quarter and our GDP was negative. Could it be that our FED would finally have to say: ‘The economy stinks even with zero percent interest rates, so maybe we should pay attention to these lousy reports?’ It’s possible.

Our stock market has been narrow for weeks because the broader market refuses to participate in the ‘love-fest’. The Advance/Decline line on the NYSE has been faltering recently, and last week fell below its long-term trend line. This is another example of the disconnect between the well-known headline indexes and the broader overall market. There comes a point where this disconnect will simply be too large. You can't (for example) have the DOW at 30,000 while the broader market falls to the 2009 lows.

Our Central Banks, Wall Street and Corporations have sold debt – to raise cash – to do stock buy backs – to push the DOW and S&P to absurdly high levels. It is relatively easy to use derivatives via the futures market to push the DOW (30 stocks) and the S&P (100 stocks) higher. It is (however) much harder to get the other 4,000 publicly traded stocks to follow along. This is evident by such things as the DOW Transports that are more than 800 points below their old highs, and the Russell 2,000 small-cap index which is also well below its highs. So, what tends to happen is that the DOW and S&P can't ‘hang out’ up there all by themselves, and will require participation of the broader market or they will indeed come back down and re-join the other broader indices. And adding insult to injury:

- Because this market has been trading sideways for so long, technical support is not all that far below where the market is currently sitting. For example, technical support for the S&P (it’s 50-day moving average) is just 31 points below where it ended on Friday. Breaking this technical support means that the market would be free to move lower.

- Also, attempts for new highs are getting weaker and on less volume. A common pattern I see is large volume down-days and small volume up-days.

- Seasonally, the past 6 Junes have NOT been kind to this market.

- And then we are approaching ‘autumn’ when China gets accepted into the SDR basket of the IMF, and we near the termination of several ‘economic cycles’.

There are a lot of reasons to see a correction coming. I know – you can stop laughing now. We've seen this movie over 15 times in the past 6 years, and each time the Central Bankers just buy more stock, print more money, or both. I get it. But this time there is more desperation, and we just had another NEGATIVE GDP reading. After trillions in QE, zero percent interest rates, the President bragging about his great economy – the GDP number was so ugly they’re going to have to “revise their re-calculated adjustment” (whatever that means).

We know the power of Central Bank printing. We know the Trillions in stock buy backs that reduced the float and boosted stock prices. We know our FED made it so that there is virtually ‘nowhere else to put money’ other than the stock market. But, this can’t last forever. The market is tired, over priced, and very much in need of a major correction. Mother nature can only be pushed so far, before she will revolt.

My theory was that the market would breakout higher (which it did), and put in one last big push (sucking everyone in), and then pull the rug out. Well that second part hasn’t happened – yet. And, that second part is getting ‘less likely’ as the days go on.

We are below 2117 on the S&P by 10 points. I could see buyers coming in on Monday with ‘new June money’ and try to put on a show – only to have it fail. I see the market lower by the end of this week, and lower still by the end of next week. This period of indecisive chop will not last forever. It will either break out or break down, and I’m leaning toward breaking down. I suggest using smaller trading positions, and being nimble. Dips are still being bought, and rips are still being sold. Remember: the trend is your friend until it ends.

TIPS:

I’m nervous being long in this market, as the Transportation Sector has broken down, and is often a predictor of things to come. It is indeed frustrating watching this market trade sideways for 3 months. Apple (AAPL) for example, on February 23^rd closed at $132.45, and on Friday it traded for $130.28. Caterpillar (CAT) on February 17^th closed at $84.68, and on Friday it traded for $85.32.

I’m currently looking at:

- KR (Kroger) – BUY a June 75 / 77.5 / 80 Butterfly, as Kroger has earnings on June 18^th,

- SPY – SELL the 216 / 218.5 Call Credit Spread,

- NKE – BUY a Butterfly centered around the $100 price target, and

- Continue selling Iron Condors on both the SPX and RUT.

I’m currently holding:

- AAPL (Apple) – SOLD a June 110 / 115 to 135 / 140 Iron Condor,

- DE – SOLD a June 96 / 97.5 Call Credit Spread,

- IYT (Transportation Sector ETF) – SOLD the June 153 / 160 Call Credit Spread,

- IYT – BOUGHT the June / July 150 Put Calendar,

- IYT – SOLD the June 148 Put / BOUGHT the July 144 Put – creating a diagonal to the downside,

- KR (Kroger) – SOLD a June 67.5 / 70 Put Credit Spread,

- KR (Kroger) – SOLD a June 67.5 / 72.5 Put Credit Spread,

- LL – SOLD an Iron Condor – June @ 18 / 19.5 to 24 / 25.5,

- NUGT – BOUGHT shares and weekly covered calls,

- ORCL – BOUGHT June $45 Calls (Earnings are on June 18),

- RH – BOUGHT the June / July $95 Call Calendar (Earnings on June 10),

- RUT – BOUGHT June Butterfly @ 1170 / 1240 / 1300,

o BOUGHT July Butterfly @ 1180 / 1250 / 1310,

o SOLD – Iron Condor – June1 @ 1210 / 1215 to 1290 / 1295,

o SOLD – Iron Condor – June @ 1140 / 1150 to 1330 / 1340,

- TGT – BOUGHT the 80 / 82 / 82.5 Call Butterfly,

- SPX – SOLD – Iron Condor – June1 @ 2070 / 2075 to 2170 / 2175,

o SOLD – Iron Condor – June 2 @

o SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180,

o SOLD – Iron Condor – June4 @ 1945 / 1950 to 2185 / 2190,

o SOLD – Iron Condor – July1 @ 1890 / 1900 to 2195 / 2205,

o SOLD – Iron Condor – July2 @ 1905 / 1910 to 2180 / 2185,

o SOLD – Iron Condor – July2 @ 2005 / 2010 to 2180 / 2185,

o SOLD – Iron Condor – July @ 1900 / 1910 to 2200 / 2210,

o SOLD – Iron Condor – July4 @ 1860 / 1870 to 2235 / 2245,

o SOLD – Iron Condor – July5 @1870 / 1880 to 2230 / 2240,

o SOLD – Iron Condor – Aug1 @

o SOLD – Iron Condor – Aug2 @

o SOLD – Iron Condor – Aug @ 1840 / 1850 to 2250 / 2260,

o SOLD – Iron Condor – Aug4 @ , and

- SPY – BOUGHT the 200 / 207 / 209 June Put Butterfly.

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!

Disclaimer:

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: <http://rfcfinancialnews.blogspot.com> .

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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.

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Creativity = http://vimeo.com/user8991651/review/105373017/0d0c374c28

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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.

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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://rfcfinancialnews.blogspot.com/> Until next week – be safe. R.F. Culbertson

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>

Sunday, May 24, 2015

This Week in Barrons - 5-24-2015

This Week in Barrons – 5-24-2015:

Thoughts:

Dear Ms. Yellen:

Happy Memorial Day – a holiday to remember all of those who died in the service of our country. My father served in the Navy, and my wife’s father in the Air Force. The consistent, underlying theme to their actions was that they were fighting for the principles that formed the greatest nation that the world had ever seen. Principles like: personal responsibility, individuality, self-reliance, honesty, morality and many other elements that made the ‘Leave it to Beaver’ era a special (and lost) time period. To that end – ladies and gentlemen who served – I salute you.

After spending this past week in California, I can assure you that the water issues there are very real. California is going through one of the worst droughts in history, and it will affect every person in the U.S. The fertile California valley supplies enormous food stocks to our nation. It produces over 75% of the world’s almonds, and over 200 varieties of fruits, nuts and vegetables. As the drought persists, California has resisted cutting water to the farmers, but there is no way out of seeing food prices trending higher.

On a micro scale, California has a massive problem. If this situation persists and the cost of water soars to unimaginable heights or restrictions become so burdensome that people start leaving the state – then the micro problem becomes a macro problem. Can you imagine buying a home in California when the real estate agent tells you: “Oh by the way, you can only use 100 gallons of water per day or you will be fined $500 per incident." Would you want to live there? And if it gets severe enough that enough people leave, then taxes, infrastructure, police, health and human services become affected fairly quickly.

When I look at the ‘macro’ picture, food continues to climb in price and the water problems just make it worse. The biggest fallout will be the drastic reduction in inexpensive produce in our grocery stores – especially during the winter. New Jersey (the Garden State) has its ‘Jersey tomato’ and ‘sweet corn’, but nothing grows during the winter in NJ, PA, NY, CT, MA, and in over 20 other states. That's when the California produce situation will be most dramatically felt. So, what water stocks will allow us to take advantage of the shortage?

I'll be the first to admit that water stocks have not done well – because (often) nature has a way of fixing droughts on her own. But as water becomes more precious, towns and states are going to be forced to employ companies that reseal, reline, and repair aging aqueducts. New pipes are going to have to be laid because in some cities – up to 8% of the water, ‘leaks’ back into the ground.

The easy way to play the water ‘vertical’ is via the ETF labeled FIW. FIW has doubled since 2011, and can go considerably higher. CGW and PHO round out the best three ways to play water at the ETF level. Few of us think about water until it isn’t there. From drinking water to sanitation, you’ll find out quickly how important water is when you turn on the tap and nothing comes out. Think of a family of four, and what your toilet would look like in just one day without flushing.

Enjoy your Memorial Day. If you have lost someone in any of the ‘too many’ wars and skirmishes we've been in, I send my sympathies and prayers. Take the time to enjoy your family. Honor and say ‘Thank You’ to those that have passed, because all the ills that I rant about will certainly be here when you get back.

The Market:

What is really ‘going on’ in our big banks? This past week – in what passes as business as usual in 2015 – five major banks (Barclays, UBS, Citigroup, J.P. Morgan and the Royal Bank of Scotland) were fined $5.5B by the FED for rigging currency markets. That means that these same banks have been convicted and fined over $40B for: rigging the stock market, the gold market, the silver market, the LIBOR rate and now the currency markets. But no one (not even one person) is going to jail. How can that be? Excuse me, but banks didn’t push the buy or sell buttons – humans did. And that human didn’t do it unless he was told to do it – by another human. Yet, the bank gets fined, and not the person because by charging the bank (instead of the person that actually did the crime) the insiders go free and the bank’s shareholders pay the fine. The FBI was quoted as saying: "Their trader’s criminality was on a massive scale". And someone who claimed anonymity on behalf of the banks said: “We’d gladly (and most certainly will) do it again. It was just that profitable for us.” In this day and age, it’s good to be a bank. You can never do anything wrong, even when you blatantly rig a market and steal money. Al Capone would be envious.

On this Memorial Day, I’m trying to remember:

- When lying and cheating weren't the American way,

- When VA hospitals gave our brave servicemen the real treatments they deserved instead of ignoring them,

- When elected officials would tell me something resembling the truth,

- When an economic report would actually reflect the economy, and

- When a corporation's earnings were actually based upon sales of product, not buy backs and selling more corporate debt.

Factually – our stock market is at all time highs while:

- Existing home sales, durable goods orders, and retail sales – have fallen,

- The Philadelphia, Kansas City and Chicago Feds – have fallen,

- The U.S., China, and German PMIs – have fallen,

- And our GDP – has fallen, and will potentially report ‘negative’ growth when revised.

“Houston, we have a problem:”

- In terms of market pricing, it’s 34 TIMES more likely that the market falls (rather than rises) this coming week.

- In terms of market volume, the market is in its third positive week. In the past 18 months, over 60% of three-week positive episodes have switched to negative during their fourth week.

- This past week outflows from mutual funds and ETFs exceeded inflows for U.S. markets. Many investors are realizing that this economy is NOT worthy of buying over-priced stocks. Yet the Central bankers need stocks higher for the illusion of success, and to continue to sell debt. Corporations need their stocks to go higher in order to compensate their executives. Therefore, a simple recipe for investing could be – just buy stocks in companies that have enough cash to keep their own stock prices high – such as APPLE.

In terms of the FED raising rates, I’m beginning to question whether there will be a rate increase at all? In my opinion, it won’t be until 2016, and frankly, there’s a chance it doesn’t even happen then. As you all know, 2016 is an election year, and no politician will be anxious to make any sort of move that could weaken the stock market. The Fed is of course supposed to be apolitical, but board members are appointed by the President and approved by the Senate. Suffice it to say, anything they do next year will be under a microscope, and it wouldn’t surprise me at all if the Fed decides to punt any rate hikes until after the election. The Fed won’t meet again for another month, and as we know a lot can happen in that time frame. Going forward I expect things to remain choppy. We are headed full speed into summer trading, where volumes should remain depressed and movement should be slow.

The DOW and S&P have made new highs, but the ‘broad’ market hasn't really gone along for the ride. Either the S&P and DOW will stumble and fall back into the range between the highs and support at the 50-day moving averages, or the broader market will step up to the plate and join the party. The bulls will say that we’ve broken out of our range, and maintained the breakout for five days now. The bears, on the other hand, will point to a lack of conviction in following through on this breakout. And often after a long consolidation period, the ensuing breakout should lead to a relatively large move.

Where we go from here is anyone’s guess. Many were hoping to glean some clues today from the release of the Fed minutes of the April policy meeting. But the ‘highlights’ showed that some participants believed the economic weakness in the first quarter could possibly extend into Q2. In addition, many officials characterized the possibility of a rate hike in June as unlikely.

The question is this: How long can the DOW and S&P hold up, while the transports, the small caps, and the semi's lag? The reason that the broad market isn't participating in the all-time high fest is because they can't rig all the stocks to go up. It's relatively easy for our Central Banks to move the S&P to all time highs. Some well timed buys of several thousand futures contracts, and ‘up we go’. But that doesn't work for the other 4,000 (non S&P) stocks. That is why the S&P and DOW are at nosebleed highs, but things like the transports and small caps are looking terrible.

I'm still siding with the idea that they push, pull and drag the market higher. As long as the S&P remains above 2117, the breakout on the S&P is still in play. There is still some time for the broader market to catch-up. But, if it were to lose that 2117 level, I'd suspect we would see a hefty correction heading our way.

This coming week has a lot of economic reports, and if they follow the latest trends, they won't be healthy. As we know, economic reports are just works of fiction to be adjusted anyway. But I do think we could see some bigger volatility (wider point swings) as the markets try and figure out what they're going to do.

My thoughts were that we would get one last market rush higher, which would burn itself out in a ‘topping’ action – that would then start a long overdue correction. I still think that might happen. But the longer that the broader market does NOT join into the party, it lessens the odds considerably for that happening.

TIPS:

I’m currently looking at:

- TSLA (Tesla) – for a move from 250 to 260 next week. I’m looking at buying the 250 / 260 call debit spread, and selling the 245 / 235 put credit spread – just in case it trades sideways.

- JD – I thinking of buying the JUNE $32 Calls / for $3.45 and selling the diagonal against it early in the week. I’m looking for a pop to $36 – then sell the $37’s or $38’s against it.

- NFLX (NetFlix) – I see it moving up to 632 (the snow line) and that is where I will position my put credit spreads.

- CMG (Chipotle) – I think this could move much more to the downside, and am thinking of selling the $640 / $645 call credit spread. If CMG moves below $610, it could quickly take out $562.

- The Transportation Sector has: (a) broken key support, and (b) broken the up-trend line from November 2012. This is a HUGE red flag, and makes me nervous being long this market. Combine this with the decline in the ‘energy sector’, and I continue selling Iron Condors on both the SPX and RUT.

- LNG – with oil prices rolling over, I’ll be selling call credit spreads on this next week,

- NDX (QQQ) – looks strong, and as long as APPL (Apple) goes higher, companies such as SCTY (Solar City), SINA, and SPLK (Splunk) look ripe for selling put credit spreads.

I’m positioning for both a ‘choppy’ upside, and potentially a swift and brutal pullback.

I’m currently holding:

- KR (Kroger) – SOLD a June 67.5 / 70 Put Credit Spread,

- AAPL (Apple) – SOLD a June 110 / 115 to 135 / 140 Iron Condor,

- WYNN – SOLD a June 95 / 100 to 125 / 129 Iron Condor,

- CSX – BOUGHT a Calendar – May / Aug @ $38,

- IYT (Transportation Sector ETF) – sold the June 153 / 160 Call Credit Spread,

- CVX (Chevron) – BOUGHT Puts.

- NUGT – BOUGHT shares and weekly covered calls,

- ORCL – BOUGHT June $45 Calls

- RUT – BOUGHT June Butterfly @ 1190 / 1260 / 1320,

o SOLD – Iron Condor – June1 @ 1210 / 1215 to 1290 / 1295,

o SOLD – Iron Condor – June @ 1140 / 1150 to 1330 / 1340, and

- SPX – SOLD – Iron Condor – June1 @ 2070 / 2075 to 2170 / 2175,

o SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180,

o SOLD – Iron Condor – June4 @ 1945 / 1950 to 2185 / 2190,

o SOLD – Iron Condor – July1 @ 1890 / 1900 to 2195 / 2205,

o SOLD – Iron Condor – July2 @ 1905 / 1910 to 2180 / 2185,

o SOLD – Iron Condor – July2 @ 2005 / 2010 to 2180 / 2185,

o SOLD – Iron Condor – July @ 1900 / 1910 to 2200 / 2210,

o SOLD – Iron Condor – July4 @ 1860 / 1870 to 2235 / 2245,

o SOLD – Iron Condor – July5 @1870 / 1880 to 2230 / 2240,

o SOLD – Iron Condor – Aug @ 1840 / 1850 to 2250 / 2260.

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!

Disclaimer:

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: http://www.youtube.com/watch?v=K2Z9I_6ciH0

Creativity = http://vimeo.com/user8991651/review/105373017/0d0c374c28

Investing = http://vimeo.com/user8991651/review/105373016/a5e84dd610

Marketing = http://vimeo.com/user8991651/review/105373015/d7237d026d

Sales = http://vimeo.com/user8991651/review/105373014/0e44b43962

To unsubscribe please refer to the bottom of the email.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/>
Until next week – be safe.

R.F. Culbertson

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>

Sunday, May 17, 2015

This Week in Barrons - 5-17-2015

This Week in Barrons – 5-17-2015:

Thoughts:

Dear Ms. Yellen:

Should I invest in the Chines Yuan right now? After all, the Chinese have pegged their currency to the U.S. dollar since 1994, and have never wanted their currency to soar above the dollar in any meaningful way – because it would obviously hurt their exports. However, that could change when the Chinese Yuan is admitted to the International Monetary Fund’s (IMF’s) SDR in October. I’m guessing that the IMF has arranged a deal where China has been told to maintain some exchange rate control over the Yuan, so that it doesn't fly to insane heights while umpteen trillion U.S. dollars are dumped on to the market. But it could. And it is often these ‘out of the blue’ elements that cause large financial market dislocations.

Say for example, on October 20^th a headline hits the wires that the IMF has accepted the Chinese Yuan into its SDR basket. I would expect the U.S. dollar to gradually start fading in value while the Chinese Yuan begins to rise. Now that’s not rocket science, and would tell me to invest in the Yuan right now – yes? But is there a better potential investment in gold and/or silver? After all, gold has been artificially held down in order for China to amass enough of it until such a time that its currency would be included in the IMF’s global SDR (Special Drawing Rights) basket. I could make the case for the ‘price caps’ being removed as soon as the SDR announcement would be made. And along those same lines, I would expect gold and silver to rise (along with the Yuan) over the next 6 to 12 months following the announcement.

But, silver has been capped in the same way as gold, so, which one makes the better investment? I think there are a few considerations:

- First, the rise in the Yuan will be gradual so as to prevent currency disruptions.

- Secondly, there is a general allure of gold. Yes it is not money and pays no dividend, but it is used at the very upper echelons to judge the wealth of nations.

- Finally, gold is used to store wealth – not create it. Gold tries to help you keep what you've made and fight off inflation. Now (however) there is a chance of actually making some money on the metals again when the controls are lifted and before they ‘go to sleep’ again for a long time.

Which to invest in is a good question, and often based upon expectations. Currency fluctuations are normally capped at approximately 15% per year. I (however) think that gold will move from its current price of $1,220 per ounce to about $2,600 dollars an ounce over the next 3 years. I also believe that silver will move from around $18 an ounce to $70 per ounce in the not too distant future. Gold moving from $1,220 to $2,600 is a 110% gain. Silver moving from $18 to $70 is a 288% gain. So in percentage terms, Silver is the better investment – if these numbers hold true.

But let’s do the math using their most recent highs rather than some arbitrary number. In 2011 gold hit $1,900/ounce and silver hit $49/ounce. One gold coin going from $1,200 to $1,900 nets you $800 dollars. $1200 buys you 67 silver coins at $18 per ounce, and if these 67 coins went from $18 to $49 apiece – it would net you $2,077. Therefore, silver wins again.

The reason that I think silver can indeed pull off multiple price increases is simply because all those that cannot afford gold, tend to run to silver when gold is going higher. This increased demand causes an excess of 100% gains, and even 250% price increases if history is our guide. Bottom line, I like both silver and gold, and will invest in both physical metals over the next several months.

The Market:

Break out the trumpets, the kazoos, and the flags – as this week the S&P index made another all-time high. It doesn’t matter that:

- Our first quarter GDP was negative,

- The official retail sales report was the worst since 2009,

- The WSJ said: “We just saw the worst set of economic reports since the great recession",

- Last quarter a record number of Americans renounced their citizenship, and

- Consumer confidence fell in May by the largest margin in two years, dropping from 95.9 to 88.5 – far below even the lowest estimates by 68 economists. The reasons cited were the stalling American economy and rising fuel costs.

After all, our Central Bankers are evil, but not stupid. They created a debt based system funded by ever-rising asset prices. These same Central Bankers are forced to make prices rise even further in the face of a terrible economy. We know that the Fed is chomping at the bit to raise interest rates, but the Fed doesn’t meet again until June 16 to 17. This leaves the markets (and the Central Banks) over a month to be left to their own devices.

Of course I question the authenticity of the breakout:

- The XLF (the financial ETF) was actually down on Friday,

- The IWM (the ‘small cap’ ETF) is still below its 50-day moving average,

- On a break out to new highs you want increased volume, and we didn’t get it,

- The DOW transports are well below their 50-day moving average, and

- The semiconductor index hasn’t even regained its April highs – let alone all-time highs.

All of the indicators for market participation are fairly weak, but the breakout has held for now. However, if the market participation does not broaden out, this rally won’t last for more than a few days. I tend to think that the Central Bankers will throw the kitchen sink at holding up this market rally. If the market stays at these levels, some people would sell their bonds, rush back into stocks, and we could see a quick rush higher in equities. But I think that this ‘rush’ would burn out quickly, and we would roll over into a long correction.

I think the ‘big picture point’ is this – if this breakout holds and we do see the market run higher, I do not think that it has long legs. In other words, this rally has limited upside potential. Frankly, I'd be surprised to see us gain more than another 300 points on the DOW, and maybe another 45 points on the S&P – before we exhaust ourselves and see a hefty pull back.

For years this market has pushed higher in the face of every ill you could conceive: a war in the Ukraine, Isis running amok, horrid economic reports, and terrible employment participation numbers. Just last month over $70B was pulled out of U.S. equity funds. If the market starts to advance again, a lot of that $70B could flow right back into our equity markets. Would it not be just like ‘Mr. Market’ to suck J.Q. Public in, giving the illusion that this market is destined for much higher prices, and then yank the rug out from under him? It certainly would, and that's what I think will happen.

While it's not written in stone, and yes this breakout could fail from here – if market participation increases then I think it's the beginning of the end. But as long as they keep the S&P over 2117, we should see them pull the financials, small caps, and semiconductors in with them and give us one more shot higher. If (however) we experience two closes below the 2117 level on the S&P, then I don’t think that the Central Bankers can regain their footing, and we will correct fairly rapidly.

TIPS:

Upon request – many of you have asked me to specifically detail the DUST versus NUGT trade. NUGT – is a ‘triple leveraged’ gold mining ETF that moves up and down with the mining EFT’s – GDX and GDXJ. DUST is basically the exact inverse of NUGT – and moves (almost tick by tick) in the exact opposite direction as NUGT. The trade I’m proposing is a one-day trade (every Friday) – involving DUST, NUGT and weekly options that expire that same day. The trade will net you between 1 and 2% every Friday – with virtually no risk.

- On Thursday – between the hours of 3:30 / 4:00 pm – you purchase equal $ amounts of DUST & NUGT. The goal here is to have the underlying assets offset themselves, and you simply collect the ‘covered call’ premium.

- On Friday between the hours of 9:30 / 10:00 am – you sell ‘covered calls’ on both of your DUST & NUGT positions. The strike prices of the covered calls are the closest, higher prices to their respective assets.

- For example: if DUST were selling for $13.24 – your strike price for the covered call would be $13.50.

- If NUGT were selling for $12.05 – you may (either) want to see if NUGT would fall below $12 – before selling at a $12 strike price, or see if NUGT rises closer to $12.50 to sell the $12.50 strike premium.

- Now, as long as DUST and NUGT remain below their strike prices you do nothing – and the covered call premium will remain in your account.

- If (however) one of the assets (NUGT) goes above their covered call strike price – you simply need to immediately purchase (again) as much of that same asset (NUGT) as you did previously – in order to offset the continued downward movement in the opposite asset (DUST).

- In this case the covered call on DUST would remain in your account – and you would make the covered call minus any small assignment fee on the part of NUGT.

- Depending upon the covered call strike prices – this should net you between 1 and 2% every Friday.

- You then sell the assets (first thing) on Monday morning – and ‘rinse-n-repeat’ on Thursday / Friday.

I’m currently looking at:

- UPS over 101.70, ACM over 34.10, and RTN over 108.00.

- ADBE (Adobe) is testing resistance @ $80,

- THC (Tennet Healthcare) looking for a Put Credit Spread,

- GPRO (GoPro) and NKE (Nike) looking at a Put Credit Spread, and

- Kansas City Southern came out with a horrible update, yanking their guidance for the year. But of course they announced the mandatory stock buy back to try and keep their share price up despite lousy fundamentals.

I’m currently holding:

- KR (Kroger) – SOLD a June 67.5 / 70 Put Credit Spread,

- AAPL (Apple) – SOLD a June 110 / 115 to 135 / 140 Iron Condor,

- WYNN – SOLD a June 95 / 100 to 125 / 129 Iron Condor,

- CSX – BOUGHT a Calendar – May / Aug @ $38,

- NUGT – BOUGHT shares and weekly covered calls,

- DUST – BOUGHT shares and weekly covered calls

- ORCL – BOUGHT June $45 Calls

- RUT – BOUGHT June Butterfly @ 1190 / 1260 / 1320, and

- SPX – SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180,

o SOLD – Iron Condor – June4 @ 1945 / 1950 to 2185 / 2190,

o SOLD – Iron Condor – July1 @ 1890 / 1900 to 2195 / 2205,

o SOLD – Iron Condor – July2 @ 1905 / 1910 to 2180 / 2185,

o SOLD – Iron Condor – July2 @ 2005 / 2010 to 2180 / 2185,

o SOLD – Iron Condor – July @ 1900 / 1910 to 2200 / 2210,

o SOLD – Iron Condor – July4 @ 1860 / 1870 to 2235 / 2245,

o SOLD – Iron Condor – July5 @1870 / 1880 to 2230 / 2240,

o SOLD – Iron Condor – Aug @ 1840 / 1850 to 2250 / 2260.

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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