This Week in Barrons – 5-3-2015:
Dear Ms. Yellen:
This week we learned that our economy grew (via the first quarter Gross Domestic Product (GDP)) at a whopping +0.2%. So, after trillions of dollars in QE and constant market manipulations, the economy missed going negative by two tenths of one percent. And without the large inventory buildup addition to GDP, our first quarter growth would have been negative -2.4%. Obviously, if this market goes to new highs, it won't be on the back of a growing economy.
Ms. Yellen, with a shrinking economy as a backdrop, I couldn’t (for the longest time) figure out why you would ever raise interest rates? And then it came to me; the ‘black swan’ event that you fear is the inclusion of the Chinese Yuan into the Special Drawing Rights (SDR) calculation. Allow me to explain my thinking. SDRs are an alternative reserve currency that can be used to backstop reserves and even pay back obligations to the International Monetary Fund (IMF) and member nations. SDRs can't be used to buy or sell products – just currency. Soon, they will be changing.
Currently only 4 currencies make up the SDR: the Japanese Yen, the European Euro, the British Pound Sterling, and the U.S. Dollar. Conspicuous by its absence is the Chinese Yuan, and all signs point to China being included in the SDR in October. That will not only increase China's voice in the IMF, but it will allow their currency to be freely traded across the globe.
Countries wishing to diversity their currency reserves have only the 4 choices listed above with the U.S. dollar being the best looking horse in the glue factory. In other words, the minute the Chinese are accepted into the SDR basket, it paves the way for all nations to diversify some holdings away from Yen, Dollar, Euro and Pound and into the Yuan. That means that U.S. Dollars would be sold in order that nations could buy Yuans – i.e. the demand for the U.S. dollar will fall. And that Ms. Yellen, is the ‘black swan’ event that I think you’re worried about. You know that when the Chinese Yuan is added to the SDR, they are going to become a reserve currency, and some amount of dollars will be sold to accumulate them. The demand for U.S. dollars is one of the main reasons that we have been allowed to live far above our actual economic situation, and removal of that demand will manifest itself in many ways starting with inflation.
When China is admitted to the SDR, then the dollar will fall (maybe a lot). If demand for U.S. dollars falls, our Treasury will need to fund their notes by either: increasing taxes (2016 is an election year), printing more money (we just ended QE), or increasing interest rates.
Ms. Yellen, that is why, (despite lousy economic news, horrible economic reports and truly ugly data) you’re blaming the weather and the fall in oil prices for our declining economy – is it not? That also explains why you keep doctoring up the economic reports, and why you tapered the QE program. You are desperate to raise rates to offset what you see coming with a declining dollar. You also know that the Chinese admittance will cause large dollar dislocations, and that could set the price of gold free.
What I’m struggling with is that during my lifetime, I will have witnessed our politicians and our Fed take the single best economy on earth and completely transform it into the #1 indebted nation on earth in just a few decades. No one could possibly make that many consecutive mistakes. This had to be done on purpose. I’m struggling with that purpose.
The market continues to move sideways with ‘dips’ getting bought and ‘rips’ getting sold. This market is going to resolve itself at some point. A couple closes over 2117 on the S&P and we’ll move higher, where a couple closes under the 50-day moving average at 2090 and we will be heading lower. In between those two, we have a crapshoot.
- According to Goldman, corporate stock buy-back orders are up 23% year over year, and last year was an all-time record year,
- Construction spending hit a two year low, and
- Shortly, corporate stock buy-backs will come to the market’s rescue (as they have had to wait until after earnings).
I’m only looking for a market correction if:
- The Dollar (DXY) continues to weaken, and breaks below 95,
- The 10-year note continues to march higher above 2.2%,
- Oil continues its march higher, and exceeds $60 a barrel,
- More cities (like Chicago) show financial distress, and get their debt downgraded, and
- The Volatility Index (VIX) gets below 12 – showing complacency. As a general rule, I like to see the VIX around 16. The VIX below 14 shows an unconcerned market, and is where I often begin to buy hedges / insurance. The VIX below 12 shows a market ‘ignoring all risk’, and is where I begin to over-insure. The VIX in single digits signifies that a big move is coming – either up or down.
Currently, we are watching a tug-of-war being waged between the fundamentals and manipulation. The fundamentals tell us that ‘this market must submit and fall’ while the manipulators say ‘this market must continue higher, or all hell will break loose’. In the long run, the fundamentals will win out, but the ‘long run’ can be a lot longer than you'd think. We are currently 6 years into a bogus recovery, and no one expected it to last this long.
Thus far, the March 2 and April 24 highs have been a concrete wall that the market can't break through. But each time the market nears or violates its 50-day moving average to the downside, it gets a jolt of joy juice and up we soar again. It’s been 2 months of this sideways chop for a market that is destined to either breakdown or breakout.
I continue to watch the levels. Until we get over 2117 on the S&P or until we lose 2040 on the S&P, we are still in the channel and bouncing up and down like a yoyo. If we were to put in 3 market closes over 2117, I'd feel confident we've got at least one last hurrah run in us before the wheels fall off. If (however) we put in 3 or more closes under the 50-day at 2090, I'd be watchful for a quick fall to the lower boundaries at 2040, and if we lost that – the party's over.
So until we get a breakout, or a breakdown, my game plan is the same. I snag a few long side trades on the upswing, and take profits quickly. Then I sidestep the drops as best I can, and wait to re-enter. If we break through the highs and hold, I'll load up in anticipation of the one last push for glory. If we lose the 2040 level, I’ll begin to take on long-term short positions.
Currently looking at:
- WYNN – bad earnings – looks to be overdone – selling Put Credit Spread,
- KSU (Kansas City Southern) – to the upside – selling a Put Credit Spread,
- RH (Restoration Hardware) – to the upside,
- AAPL (Apple) – to the upside,
- SPX – Iron Condor – July 10th expiration, and
- Calls on INTC > 33.20, MS > 37.70, AA > 14.20, DANG > 9.70, SCI > 28.40, USO > 20.60, FNV > 53.50 and PAAS > 10.
I’m currently holding:
- CRM (Salesforce) – SOLD - Iron Condor – May @ 67.5 / 70 to 77.5 / 80,
- CSX – BOUGHT - Calendar – May / Aug @ $38,
- DIS (Disney) – BOUGHT - May Calls @ $111,
- GLD – BOUGHT MAY Call Debit Spread @ +112 / -120,
- NKE (Nike) – BOUGHT - May Calls @ 98.50,
- NUGT – BOUGHT shares and weekly covered calls,
- DUST – BOUGHT shares and weekly covered calls,
- ORCL – BOUGHT MAY / JUNE Call Calendar @ $45,
- RUT – BOUGHT June Butterfly @ 1190 / 1260 / 1320,
- SPX – SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180, and
- UNH – BOUGHT – Calendar – May/June @ $115
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!
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: < > .
Please write to Mr. Culbertson at: <firstname.lastname@example.org> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference < >.
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:
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
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.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
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.