This Week in Barrons – 6-14-2015:
“If you can’t believe in studio wrestling, what can you believe in?” … Zoog’esque
Dear Ms. Yellen:
To quote Dusty Rhoades: “You don’t know what hard times are. Hard times are when a man has worked at a job for 30 years, and they give him a watch, kick him in the butt and say ‘hey a computer took your place.’ Those are hard times.” Dusty Rhoades (a studio wrestler) passed away this week, and took a piece of ‘Middle America’ with him. I grew up watching Dusty Rhoades, Rick Flair and others wrestling on Saturday mornings.
About now you’re probably wondering what an ‘entertainer’ like Dusty Rhoades, and something as fake as the WWF (World Wrestling Federation) – have to do with anything surrounding our financial community. Unfortunately we learned this week that almost three quarters of the earnings numbers we hear are fake – and NOT at all that entertaining. Yes, the numbers that are being communicated to us by our banks and major corporations are as ‘fake’ as a $3 bill. This week the AP released a study that compared the ‘real’, bottom-line profit figures in the S&P 500 companies that follow GAAP (Generally Accepted Accounting Principles) to the ‘adjusted profit’ figures that they put out to the media and the analysts. In a nutshell, we really can’t believe ANY of the numbers that we hear:
- 72% of the S&P had ‘adjusted their profits’ higher than their REAL net income. And the ‘adjustments’ are 77% higher than they were just 5 years ago.
- To put this in context, from 2010 to 2014 the ‘adjusted profits’ for the S&P 500 came in $583B higher than their respective real net incomes. It is as if each company in the S&P created 8 months of additional / ‘fictitious’ earnings.
- Example #1: Boston Scientific (a maker of medical devices) recent ‘wrote-off’ a poor acquisition. Instead of reporting their corresponding quarterly results as a loss of $4.9B, they lied and reported the ‘adjusted profit’ number as a $3.6B gain. I listened to the earnings call, and the CFO used the words ‘adjusted profit’ 34 times – twice every minute.
- Example #2: Salesforce.com should show ‘stock awarded to executives’ as an expense in their profit calculations, but this would have shown a $712M loss over 5 years rather than their reported $1.2B gain.
We stand on the 800-year anniversary of the Magna Carta (originally drafted June 15, 1215) – if you can’t believe the numbers, what can you believe in? The Magna Carta played a formative role in the development of our own Constitution. It promised the protection of worship rights, illegal imprisonment, access to swift justice, and limited payments to the government. It formulated the protections that we now call individual freedoms, allocated powers to the government, and laid the foundation for legal principles such as habeas corpus. As SF said: “Today, we live in a world where we continue to fight against the same issues, only with an ebb and flow of regulations dependent on the balance (or imbalance) of the members holding the Executive, Legislative and Judicial branches. Today, we fight for our essential freedoms afforded to individuals, corporations, and our own version of the Magna Carta – the American Constitution.”
Mr. Rhoades, every Saturday morning you fought for and communicated with ‘Middle America’. At this stage I have to believe that the wrestling you did – was more ‘real’ than our current economy. I have to believe that we should force our current batch of CFO’s to sit down and watch you wrestle – so that they can get a real understanding of reality versus fantasy, and at least learn to be more entertaining.
- BP claims that (excluding the 2008 crisis) oil consumption is the lowest it's ever been in the 21st century. Does that sound like a global recovery to you?
- On Thursday the European Commission gave France, Italy and nine other EU countries two months to adopt the new EU resolution for propping up failed banks. These new rules will force creditors and shareholders to contribute to bank rescues. Why the sudden sense of urgency? Why – because the EU knows that there is another situation brewing, and they want to make sure that the banks have a way out via their shareholders.
- Finally – Greece needs to default, return to its own currency, devalue, and restructure. But the EU has three issues with that. First, it would be the first solid evidence that the EU was a doomed alliance from the start. Secondly it raises the fear that other nations could exit the Euro. And finally, Greece is a NATO country, and NATO doesn't want them ‘going it alone’ and possibly making deals with Russia or China. This is why they've kicked the can down the road for so long. Of course the EU leaders know that Greece cannot and will not make its payments. At this point they’re just praying that they can keep the ponzi scheme alive.
So what do we make of this market? Has it topped out, or is this just more sideways slop as they try and base for another shot at making new highs? On a technical basis this market is signaling that it is ready to roll over. Since the March 2nd high, we’ve tried to breakout 3 times and have failed 3 times. A chart of the S&P (SPX) shows that it doesn’t fall under its 100-day moving average for long, and Friday ended the day just 6 points above that line.
My point is that the S&P has failed to breakout to new highs, and has clear support at its 100-day moving average. The failed breakouts tell me that this market is not as strong as we may think. The breakouts get their fuel from Greek bailout rumors, ‘fake’ adjustments, and increased corporate buy backs – not from fundamental buying on the part of the investment community. On a purely technical basis, I'd say the market is poised to fade further from here. But the ‘banksters’ could come out at any time and say that Greece has been fixed or invent some economic data that sends us up to challenge the all time highs.
We are witness to an epic battle. On one side the fundamentals of the economy are telling us that it ‘stinks’ out loud. On the other side is a ponzi scheme where asset prices MUST continue to rise in order for corporations to use those same assets as collateral to continue to borrow. In order to keep these asset prices rising, we've seen them employ all kinds of financial manipulations from bailouts, to QE, to twists, to Japan printing trillions, to the ECB going QE crazy. They've manufactured economic data, created rumors, and completely faked the numbers. These efforts are not going to stop. Yet by the sharp rise in interest rates this week, it seems that there does come a point where the market forces say ‘enough’, and all of these schemes begin to fail. I think we're nearing that point.
This coming week will bring us the Federal Reserve meeting, and as usual all eyes will be on what Ms. Yellen has to say. If Ms. Yellen continues to tell us that ‘all is well’ and rate hikes are coming – the market may very well have a knee-jerk reaction downward. But if she talks of leaving rates alone, we could see a massive run back to the highs.
Isn't it wonderful having to invest based on rumors, lies, FOMC drama and banksters? But that's the hand we're dealt, and we have to play through it. My feeling is that the market is heavy, it should roll over and play dead, but they will indeed continue to try their best to manipulate it higher, resulting in more chop and volatility this coming week.
So, we have a market stuck within a tight 300-point DOW trading range of between 17,800 and 18,100. But what’s more concerning is the volume. Last Thursday and Friday were two of the lowest volume days of the year. Faced with a tight range and low volume, the trick is to not over-trade.
The Transports are still below their 21-day exponential moving average, and that bothers me. The Central bankers have two choices: One – let the market crash and then reconstruct, or Two – continue the ponzi scheme until they can't. We're back to ‘buying the dips and selling the rips’. Fundamentally, this market is out of gas, and it's all about Central bank interventions. I think all that really matters is S&P (SPX) 2100. It's been like that most of 2015, and there is zero evidence that it is changing. There is a lot of money being made keeping this market in a range, and selling premium outside of that range. When there is so much money being made in a deal like that, it will keep going until it can no longer be contained. I love the idea of selling spreads around the 2100 strike on the SPX. That being said, most stocks (in the S&P 500) will also then stay in a tight range. I think there will be a big opportunity for selling premium into next week's monthly options expiration – with the idea of ‘contained moves’ being the order of the day.
I’m currently looking at:
- PANW (Palo Alto Networks) – Buying the June 172.5 / 177.5 / 180 Broken Wing Butterfly, and Selling the June 165 / 167.5 Put Credit Spread to pay for it,
- DPZ (Domino’s Pizza) – Selling the July Iron Condor = 95 / 100 to 125 / 130,
- And continue selling Iron Condors on both the SPX and RUT.
I’m currently holding:
- CMG (Chipotle)– BOUGHT – June 610 / 600 / 590 Put Butterfly, and SOLD – June 630 / 632.5 Call Credit Spread,
- CVX (Chevron) – BOUGHT the June 97 / 100 / 105 Broken-wing Butterfly,
- DE (Deere) – SOLD a June 96 / 97.5 Call Credit Spread,
- FB (Facebook) – BOUGHT the June 78 / 80 / 82 Put Butterfly,
- FEYE (FireEye) – BOUGHT – June 48 / 52 / 53 Broken Wing Butterfly, and SOLD – 45 / 48 Put Credit Spread,
- IWM – SOLD the August 112 / 114 to 132 / 134 Iron Condor,
- IYT (Transportation Sector ETF) – SOLD the June 153 / 160 Call Credit Spread, and BOUGHT the June / July 150 Put Calendar, and 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,
- LL – SOLD an Iron Condor – June @ 18 / 19.5 to 24 / 25.5,
- ORCL (Oracle) – BOUGHT June $45 Calls (Earnings are on June 18),
- RUT – SOLD the August 1140 / 1150 to 1330 / 1340 Iron Condor,
- SPX – SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180,
o SOLD – Iron Condor – June @ 2055 / 2100 to 2100 / 2045,
o SOLD – Iron Condor – July2 @ 2005 / 2010 to 2180 / 2185,
o SOLD – Iron Condor – July2 @ 1985 / 1990 to 2190 / 2195,
o SOLD – Iron Condor – July2 @ 1985 / 1990 to 2160 / 2165,
o SOLD – Iron Condor – July @ 1990 / 1995 to 2180 / 2185,
o SOLD – Iron Condor – July4 @ 1860 / 1870 to 2235 / 2245,
o SOLD – Iron Condor – July4 @ 1940 / 1945 to 2175 / 2180,
o SOLD – Iron Condor – July4 @ 1955 / 1960 to 2185 / 2190,
o SOLD – Iron Condor – July4 @ 1955 / 1960 to 2175 / 2180,
o SOLD – Iron Condor – July5 @ 1870 / 1880 to 2230 / 2240,
o SOLD – Iron Condor – July5 @ 1925 / 1930 to 2195 / 2200,
o SOLD – Iron Condor – July5 @ 1935 / 1940 to 2195 / 2200,
o SOLD – Iron Condor – July5 @ 1925 / 1930 to 2185 / 2190,
o SOLD – Iron Condor – Aug1 @ 1935 / 1940 to 2225 / 2230,
o SOLD – Iron Condor – Aug2 @ 1920 / 1925 to 2230 / 2235,
o SOLD – Iron Condor – Aug @ 1840 / 1850 to 2250 / 2260,
o SOLD – Iron Condor – Aug @ 1885 / 1890 to 2180 / 2185,
o SOLD – Iron Condor – Aug4 @ 1895 / 1900 to 2195 / 2200,
o SOLD – Iron Condor – Aug4 @ 1895 / 1900 to 2240 / 2245,
o SOLD – Iron Condor – Sept1 @ 1880 / 1885 to 2215 / 2220,
o BOUGHT – a June Butterfly centered around 2100 with the wings a single standard deviation (45 points) wide,
- SPY – BOUGHT the 200 / 207 / 209 June Put Butterfly, and
- TSLA (Tesla) – BOUGHT the 240 / 247.5 / 250 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!
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