This Week in Barrons – 5-10-2015:
Thoughts:Dear Ms. Yellen:Happy Mother’s Day. But didn’t your mother ever tell you: “If you don’t have something nice to say about something, don’t say anything at all?” Well, it seems that when you were questioned about the U.S. economy last week you said: “Equity market valuations are quite high, and there are potential dangers there. The stock market is too high. And when we raise interest rates, we’re going to raise them a lot.” Don’t you think that those were rather ‘mean’ words to say – about an economy to which you are the appointed ‘mother’ – 4 days before Mother’s Day?
One of the problems you’re facing is the changing corporate allegiance from serving their customers to pushing their stock price higher. A perfect example is the announcement on Friday by Dow Chemical. They announced 1,750 job cuts, while simultaneously announcing that they are boosting their share buy back to $10B. That’s it in a nutshell. Currently the most important thing to companies is NOT expansion, taking care of their employees or their customers, but rather an ever-increasing stock price.
I also tend to think of you as a boxer in a heavyweight-boxing match. It’s you and the Fed against that new, ‘up-and-comer’ – the Chinese economy. You must realize that for all intents and purposes, you and the Fed have driven the U.S. economy into the black hole of debt, blown up our banking system and have single-handedly diverted all of today’s global monetary energy toward Asia. I don’t expect you and the Fed to do down without a fight, and in fact – as soon as the Chinese currency is included into the SDR program in October – I truly expect disruptions. Do I expect the dollar to fall? Yes. Do I expect the Yuan to rise? Yes. But beyond that, we still have the situation where the U.S. is mired in debt, and our debt is not payable by any realistic means.
As if to add insult to injury, the Chinese have been accumulating gold ferociously over the past five years. They will not allow an ounce to leave the country. With the Chinese Yuan being included into the SDR basket in October, I think that many of the price controls on gold will be lifted. I do not believe that it just starts soaring higher, but I do believe that more commercial banks and speculators will begin to start trying to take it higher. China may even WANT the price of gold to go higher. And if gold moves higher in October, then silver should move along with it. It won’t happen instantly – there will be a lag – but at that point there is no reason to keep them constrained.
Happy Mother’s Day Ms. Yellen. Potentially a revenue stream for you and the Fed could be to sell tickets to watch your boxing match. It should be at least as exciting as the Mayweather – Pacquiao match.
The Market:On Friday, the Jobs Report came in on the heels of:
- Receiving the worst wholesale sales data since 2008,- Learning that a record 93M Americans are no longer in the work force,- Hearing the CEO of US Steel say that the American steel industry is so badly hurt it may need tariffs on Chinese steel in order to SURVIVE,- Having the Challenger lay-off report soar to 61,500 in April – up over 53% year over year,- Watching mortgage applications fall 4.6%,- Seeing our nation's trade deficit increase 43% to $51.5 billion in March suggesting that U.S. 1st Quarter GDP will be revised downward from an already meager 0.2% gain,- Watching April’s monthly inflows to international ETFs of $25B surpass March’s five-year high of $22B, and- Seeing investors pull a net $16B from U.S. equity ETFs in April.
The details of the Payroll’s report that we received on Friday show that payrolls increased by 223k in the month of April. This was slightly more than estimates of 218k, with March payrolls being revised downward by 41k – from 126k to 85k. The birth/death model accounted for 213k of these jobs – so only 10k ‘real jobs’ were created last month. And (to top that off), the household survey data suggested that part-time jobs made up the over-whelming majority of all jobs created. I consider this a Goldilocks report because it wasn’t too good that the Fed would hike rates, and wasn’t too bad that the economy could be faltering.
But then why did the markets have such a large rally on Friday? It’s because ‘the street’ knows that this is a ‘bogus’ report. It’s horrid that the March employment numbers were revised downward from 126K to just 85K. But worse is that the ‘birth/death’ model (an admittedly fictitious government number) eliminated 95% of all of the reported job gains. So virtually all of the jobs gains for April were ‘made up’, and March was darn near negative. ‘The Street’ figured that these numbers put the Fed on hold for rate hikes – at least in the short term. And therefore, Friday’s close had the S&P at 2116 – just one point shy of the all-time closing highs. Now the question becomes: Do we break free and set out on a new leg higher, or is this a ‘top’ that will hold firm again – just like it has since March 2nd?
It’s my view that the Fed has perverted the entire financial structure in order to keep this ponzi scheme alive. That is to say they have allowed a debt based money system to give the illusion of prosperity. If the Fed tried to reverse course and return to ‘normalcy’, it would make them appear impotent and incompetent. They simply will not take that path, and days like Friday show me that the Fed can do incredible things. The DOW gained 267 points like it was nothing. Where did all of the money come from for such a push higher? Money flows show me that I came from foreign Central banks. In fact the Swiss National Bank recently stated that they own $34B worth of U.S. stocks, and that they are not alone.
So the Fed wants this market higher, and they can employ foreign banks as a method of getting it there. With that in mind, I think we punch through the 2117 level and set off another run higher, but I think it will be an exhaustion run for the roses. Remember the market's number one job is to ‘take’ as much money from as many people as possible. For two months the market has been trading sideways, and most mutual funds and ETFs have experienced drawdowns. Figures show that almost $70B has fled U.S. equities and moved into bonds and money markets. It would be just like ‘Mr. Market’ to run higher – drawing all of that money back into stocks, and then have a downward correction.
I'm leaning toward the idea that we break out to new highs, and move higher as everyone tries to get back in. But, in a relatively short period of time, we mark a significant top and finally enter a prolonged correction. However, all of that is just conjecture until we put in a few good solid closes above the S&P 2117 level.
I’m currently looking at:
- KR (Kroger) – a June 65 / 67.5 Put Credit Spread,- AAPL (Apple) – a June 110 / 115 to 135 / 140 Iron Condor,- WYNN – a June 95 / 100 to 125 / 129 Iron Condor,- FEYE (FireEye) over 42.55, and JPM (JP Morgan) over 65.50,- DD over 75.10, IBM over 173.40, and TJX over 67.70When I consider buying a specific commodity, I often drift toward the following companies first:
- Copper = FCX,- Gold = ABX,- Oil = PDCE,- Industrial Metals = TCK,- Oil Exploration = CLR,- Oil Equipment = NOV,- Chemicals = WLK,- Steel/Iron = VALE, and- Machinery =JOYI’m currently holding:
- CRM (Salesforce) – SOLD - Iron Condor – May @ 67.5 / 70 to 77.5 / 80, and SOLD a – 71 / +68.5 Put Credit Spread,- CSX – BOUGHT - Calendar – May / Aug @ $38,- GLD – BOUGHT MAY Call Debit Spread @ +112 / -120,- HERO – BOUGHT more Stock @ < $1,- NUGT – BOUGHT shares and weekly covered calls,- DUST – BOUGHT shares and weekly covered calls,- ORCL – BOUGHT MAY / JUNE $45 Call Calendar, and BOUGHT more June $45 Calls,- RUT – BOUGHT June Butterfly @ 1190 / 1260 / 1320,- SPX – SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180, o SOLD – Iron Condor – July @ 1900 / 1910 to 2200 / 2210,
o SOLD – Iron Condor – July2 @ 1905 / 1910 to 2180 / 2185,
o SOLD – Iron Condor – July2 @ 2005 / 2010 to 2180 / 2185, and
- UNH – BOUGHT – Calendar – May/June @ $115
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Please be safe out there!
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Until next week – be safe.