This Week in Barrons – 5-17-2015:
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 20th 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.
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.
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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