This Week in Barrons – 8-16-2015:
Stayin’ Alive: The formula is: Revenue – Costs = Profit or Loss. This is a formula that Greece and most Western nations ignore, and consequently leads to massive deficits and debts. Unlike the United States and Japan, most nations do not possess their own central bank, and therefore cannot simply print away their money problems or monetize their debt by printing money and buying their own bonds. Their only option is fiscal responsibility. Unfortunately Greece gave up their own currency (the drachma) when they joined Euro Zone. Of course if Greek history is any measure, even with their own currency they have repeatedly led their economy into the toilet and hyperinflation. There is a reason it is called a Greek tragedy. Most recently the Greek Prime Minster, Tsipras, (while feeling ‘unloved’) asked parliament for a vote of confidence on August 20th. August 20th just happens to be when the Greeks are due to to make their first bailout debt payment. What is interesting is that if Tsipras loses the vote of confidence, it would not only trigger another election, but would also halt any bailout agreement, pitch Greece into full economic turmoil and put a default on the payment. So we have that to look forward to this week.
Lookin’ for a Job? If you’re looking for full-time employment, do NOT go to California. California is ranked 2nd amongst all 50 starts for the highest underemployment rate – 14%. California’s economy is heavily dependent on agricultural production in its Central Valley, which is one of the nation’s largest food sources. Agriculture’s demand for water is high, and the state’s ongoing drought has been costly. According to The Atlantic, the agricultural sector lost $2.2 billion and 17,000 jobs in 2014 due to drought. Full-time work was even more scarce in Los Angeles County, where the underemployment rate was 16.0%. On the other hand, while the labor force in most states shrank from 2007 through last year, California’s labor force grew 5.1%. When looking for full-time employment, the only state worse than California is Nevada. Nevada’s underemployment rate is 15.2%, and their GDP ‘shrank’ by 13.2% from 2007 thru 2014.
Currency Wars – Pt2: Whether SDRs (Special Drawing Rights) become the new world reserve currency is speculation, but no doubt it is becoming a force and nations are using them to supplement reserves. The real concern is what is going to happen to the dollar? A rate hike could spike the dollar higher, and that would spell serious trouble for exports. If the FED doesn’t hike rates, but continues to perpetuate the belief that they will – it may buy them some time and create some weakness in the dollar short-term. If they create the perception that QE4 or some other easing policy is coming, we could see the dollar come tumbling down and spike inflation. To further complicate this issue, China (this past week) devalued their currency – not once but twice. The truth is the Fed has put themselves in a difficult situation in which they can NOT act or be direct. Either action (hike or not) accompanied by a hawkish or dovish statement will bring volatility to the dollar and to the markets. The Fed needs to devalue the dollar in a slow calming way. We face the risk of either deflation (Depression) or inflation (Hyper-Inflation), and it all comes down to the Fed. The Currency wars are heating up, and the Fed is at center stage.
There is a strong belief amongst economists that the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) will be the next world reserve currency. As a reminder, the IMF has its own ‘reserve currency’ that it uses to facilitate currency imbalances across the globe. It is called a Special Drawing Right (SDR), and is used for many things from lending to a nation for a short-term debt-covering loan, to simply augmenting liquidity during times of stress.
The SDR is made up of a basket of currencies: the U.S. dollar, the GB Pound, the Euro, and the Yen. China is the second largest economy on earth and for years they've been making a plea to get their currency included in the SDR basket. The SDR basket would bring China both prestige, and global acceptance of the Yuan. They applied for SDR acceptance in 2010, but were declined on two fronts: (a) the Yuan wasn't freely traded, and (b) the only reserves that China held were their U.S. dollar denominated holdings. As much as everyone says gold is a worthless relic, the IMF likes seeing it as a nation's reserve, and China's stated holdings of gold were too small in comparison to their GDP. So China got ‘huffy’ and threatened to sell their U.S. treasuries, which scared the heck out of the world. Then (with a bit of a ‘wink and nod’) a deal was made where the price of gold would be capped (so China could amass tons of it) and China would only ‘trickle-sell’ their U.S. treasuries.
The IMF reviews its SDR basket every 5 years and in 2015 China made another push for inclusion within the basket. China had increased their gold holdings, and had opened Yuan swap depots in almost 18 nations. The SDR ruling last week delayed the implementation of the Chinese currency into the SDR until September 2016 – due to the fragility of the global financial situation. I think the IMF feels that implementing this change prior to then is too short a time span and fears currency upheavals. For example: every major nation holds a component piece of the SDR basket. Since that basket is made up of just 4 currencies, each prudent pension fund manager, sovereign nation and major insurance carrier may have holdings in all 4 currencies at any one time. When the Yuan gets implemented, those same investors are going to sell some portion of their dollars, yen, Euros, and pounds, to raise the money to pick up a weighting of Yuans. It would make sense for the dollar to lose ground, while the Yuan rises. So the IMF does not want a dramatically falling dollar – rising Yuan situation.
All that said, this fall still carries the possibility of some real danger in the global markets. We have many economic cycles converging, the IMF vote, the ‘Shemitah’ of the Old Testament, and a possible FED rate hike – to name a few. For the last 6 months the market has been trading in a sideways box between a low of 2040 and a high of 2130 on the S&P. This range has lasted longer than any time in 50 years, and in fact we've crossed over the 2100 level 23 times (up and down) since January. Old timers will often say that when a market gets wickedly volatile, it is signaling a change in a major trend. The trend for the past 6 years has been ‘up’, so it begs the question: Are we in the beginning stages of seeing the market ‘top’ and begin a long protracted decline? It is difficult to say because the market is not at DOW 18k because of great earnings – but rather due to Central bank manipulations, QE, stimulus programs, and insane credit derivatives schemes.
When you see 200-point up days on low volume, and then days of selling on larger volume, that points to one thing – distribution. That is to say the big houses push the market higher on low volume, John Q. Public buys in, and then those same big houses sell the market right out from under John Q. Public. That same pattern has gone on for quite a while now, which also suggests that ‘smart money’ is starting to take some ‘off the table’.
Lastly, this market looks to be ‘tired’, and without some new form of stimulus plan, or QE announcement by some major nation – we could be looking at a market that is just trading sideways to see what will happen. I think the real question is what kind of ‘crash’ will it be. Will it be a series of huge 500 and 1,000-point drops, or will it be a long, drawn-out series of 10% drops, followed by bounces, and then another drop etc. My vote is with the second scenario. I think every significant decline will be countered by Central Bank buying. After all, it’s all they know how to do. Time will certainly tell, but it's certainly got my attention.
At the end of last week, Consumer Confidence came in lower than expected. The VIX (a volatility indicator) is not ‘pricing in’ this lack of confidence. In fact, the VIX (at 12.5 – 14) is pricing in a market bounce higher – with little or no probability of the market breaking down. Personally, I think the VIX is too low. With the potential volatility we face, I believe that the VIX should (at the very least) be between 17 and 18. I believe the Fed will NOT raise rates, and depending on how they phrase their FOMC statement and answer questions in the press conference, we could be setting up for a strong rally. However September is still far off and this market could sell-off prior to the Fed meeting. The lower the market goes, the lower the probability the Fed will raise rates. Expect some volatility in the coming weeks.
Now, you’ve been hearing me talk about the SPX (the S&P Index) continuing to remain around the 2100 level for some time now. To take advantage of this you can buy an August Butterfly (that expires this coming Friday) – centered around 2100. I personally purchased a 2070 / 2100 / 2130 call butterfly a couple weeks ago – creating a 1:4 risk versus reward scenario.
I’m currently holding:
- AAPL – BOUGHT – Diagonal – Sold Sep 130 Calls / Buy Oct 135 Calls,
- GOOGL – BOUGHT – Butterfly – Aug – 695 / 700 / 705,
- MDY – SOLD the Sept 245 / 250 to 285 / 290 Iron Condor,
- NDX – SOLD the SEPT $4875 / 4900 Call Credit Spread for $2.95,
- SPXPM – SOLD – Iron Condor – SEPT @ 1885 / 1890 to 2200 / 2205,
o SOLD – Iron Condor – Aug4 @ 1950 / 1955 to 2150 / 2155,
o SOLD – Iron Condor – Sept1 @ 1925 / 1930 to 2165 / 2170,
o SOLD – Iron Condor – Sept1 @ 1955 / 1960 to 2175 / 2180,
o SOLD – Iron Condor – Sept1 @ 1990 / 1995 to 2155 / 2160
o SOLD – Iron Condor – Sept2 @ 1925 / 1930 to 2180 / 2185,
o SOLD – Iron Condor – Sept @ 1845 / 1850 to 2190 / 2195,
o SOLD – Iron Condor – Sept @ 1870 / 1875 to 2215 / 2120,
o SOLD – Iron Condor – Sept @ 1925 / 1930 to 2215 / 2120,
o SOLD – Iron Condor – Sept4 @ 1900 / 1905 to 2175 / 2180,
o SOLD – Iron Condor – Sept4 @ 1900 / 1905 to 2210 / 2215,
o SOLD – Iron Condor – Oct1 @ 1895 / 1900 to 2210 / 2215,
o SOLD – Iron Condor – Oct1 @ 1905 / 1910 to 2210 / 2215,
o SOLD – Iron Condor – Oct1 @ 1915 / 1920 to 2200 / 2205,
o SOLD – Iron Condor – Oct2 @ 1850 / 1855 to 2185 / 2190,
o SOLD – Iron Condor – Oct2 @ 1910 / 1915 to 2205 / 2210,
o SOLD – Iron Condor – Oct @ 1895 / 1900 to 2185 / 2190,
o SOLD – Iron Condor – Oct4 @ 1825 / 1830 to 2200 / 2205,
o SOLD – Iron Condor – Oct4 @ 1885 / 1890 to 2220 / 2225,
o SOLD – Iron Condor – Oct5 @ 1895 / 1900 to 2200 / 2205,
o SOLD – Iron Condor – Nov1 @ 1850 / 1855 to 2205 / 2210,
o BOUGHT – Butterfly – Aug – 2070 / 2100 / 2130,
o BOUGHT – Calendar – Sold the Sept1 – 2100 Puts / Bought the Oct1 2100 Puts.
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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