This Week in Barrons – 9-27-2015:
Does the punishment really fit the crime?
GM vs VW (and the rest of the world):
Remember when GM put cars on the road that they KNEW had faulty ignition switches. The ignition switch only cost $1 to fix, but if it failed could turn your car off causing: no power, no airbags, no brakes, etc. GM knew that they had a problem, but they kept selling cars, and did not institute a recall. The confirmed deaths range from 129 to over 300. The bottom line is that people died in cars produced with a KNOWN defect. Clarence Ditlow (Exec. Dir. for the Center for Auto Safety) said: "GM killed over 100 people by knowingly putting a defective ignition switch into over 1 million vehicles. Yet no one from GM went to jail, or was even charged with criminal homicide. GM (since 1966) has paid millions of dollars to keep criminal penalties out of the Vehicle Safety Act. Today, GM officials walk off scot-free while their customers are 6 feet under." The GM fine was $900M, no criminal penalty, and a promise to do better next time.
On Monday, Fortune magazine reported that Thomas Lund (one of the highest ranking former officials of Fannie Mae) settled charges brought by the SEC back in 2011 that he helped deceive Fannie Mae’s shareholders in the run-up to the financial crisis. The suit claimed that Mr. Lund, who was the head of Fannie's single-family division, helped hide more than $100B of subprime exposure from Fannie's shareholders – allowing it to continue to back more and more risky loans. According to the prosecution, “Thanks to Mr. Lund's chicanery, the bubble in mortgage finance caught investors unaware. This resulted in losses of at least $8 Trillion in the U.S. stock market alone.” Arguably, in September 2008, this brought the entire financial industry (and the world economy) to the edge of collapse – not to mention millions of people losing their homes. Mr. Lund's penalty for his role: a mere $10,000. What's more, the penalty will not be considered a fine, but rather a "gift to the U.S. government." And let’s not forget that the government had to bail out Fannie and still controls it.
So, GM killed people – and received a $900M fine and a slap on the wrist. Fannie Mae defrauded umpteen thousands of people out of their homes, ruined their lives, and helped create the greatest financial meltdown in 75 years – and received a $10K dollar fine and a slap on the wrist.
Now enter Volkswagen. VW is one of the largest automakers on earth. The U.S. would like to fine VW $18B for knowingly allowing the car’s software to say that it was producing less carbon emissions than it actually was. They did not kill anyone. They did not swindle nations out of trillions of dollars. They openly lied about their carbon amounts, and for that will be ‘darn near’ bankrupt. Why is the U.S. pouncing on VW so hard? First, the ‘powers that be’ (including the Pope) have been pushing the danger of global warming on us for more than 15 years. According to them, global warming is the single biggest threat of all time, and they stand fully ready to regulate, tax, and make us conform to the carbon credit market. Secondly, the U.S. expects all nations to do as we tell them without question, and if they don't – bad things will happen to them: Libya, Saddam, Syria, Russia, etc.
The U.S. has been having an issue with certain aspects of Germany for a long time: from NSA spying to asking us to return their gold. Germany was vocal about not liking our Russian sanctions, and was opposed to the QE programs of the ECU. And VW had plans to build a massive all-electric car plant in China. They were going to spend 22B Euro's in China, making 15 different, electric car models – cheaper, faster, better and rechargable faster than the Tesla. Do you really think that the U.S. was going to miss an opportunity to shut down the expansion of a Chinese/German business?
I also find it interesting that the VW news broke just two days after the ‘Russia Insider’ newspaper declared that Germany was ditching its ‘Anti-Putin’ campaign and welcomed Russia’s help in Syria to end the war, and with the refugee issue. Now don't get me wrong, VW did indeed lie and break the rules. However, does the $18B punishment really fit the crime?
On Thursday evening, Janet Yellen gave a speech at the University of Massachusetts where she (at the end of her talk) almost appeared to have suffered a stroke. I was hoping that this was an inflection moment, and she would have an epiphany – look into the crowd and say: “Forget all the crap I just said. We're stealing your money, giving it to the banksters, and there's nothing you can do about it." I would have actually applauded a move so bold, but unfortunately it didn't happen.
Instead, she spoke as if the most recent FOMC ‘no rate hike’ decision didn’t happen. This message was designed to tell the stock market that this next rate hike would be a ‘one and done’, and any return to ‘normalization’ was off the table. She then said: “The lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace." So, she’s going to raise rates IF she doesn’t have to push rates NEGATIVE to save the world?
Now, there were other big headline items this week:
- Chinese President Xi visited the White house. It’s interesting when the worlds biggest debtor comes face-to-face with the worlds biggest lender.
- Presumably to prevent a government shutdown, Speaker Boehner announced his resignation.
- The UN appointed Saudi Arabia to head their human rights council. Saudi Arabia (the nation with the most beheadings) celebrated their new status by announcing the crucifixion of a teen because he mocked the king.
- And then there’s the biotech slime-ball that increased the price of his drug from $13 a pill to over $700 a pill. Given he’s an X-Jim Cramer student and an X-Hedge Fund manager, I’m guessing he made a small fortune shorting the biotech sector this week.
Bottom line? The wheels are close to coming off. Ten major markets are effectively crashing. World alliances are changing. Since 2008, the nations of the world have cut their interest rates over 550 times. Events are coming at us fast and furious: from China's market melting down to the commodity implosion, from the transport sector declining to the shipping rates collapsing. So please be careful out there.
For those of you looking to ‘short the market’ via ETF’s – consider the following:
- The S&P short is the SH. The SDS double shorts it, and the SPXU is the triple short.
- The financial sector triple short is FAZ.
- The RWM shorts the small caps. The TZA triple shorts them.
- The PSQ shorts the NASDAQ. The QID is the double short, and the SQQ is the triple short.
- INDU 16,314: We could be getting ready for a bounce up to the 16,600 – 16,800 range again
- NDX 4221: A strong move this week into 4,300 could trigger a follow-thru to 4,400 next week. Apple could be a catalyst for this move by releasing any early iPhone sales numbers.
- SPX 1931: Watch the 1960 level to see if we can rally into that zone. The VIX rallied into the close so all bets are off for Monday morning.
- RUT 1122: The Russell has been under-performing the rest of the market and that remains a concern. We need to see some real broad based strength in this index, and a solid move to 1160.
- The Biotechs (on Friday) had their largest decline in the past 7 years.
- Hedge funds are the ‘shortest’ they’ve been in the past 4 years.
- Because we’re coming into earnings season, I think the chance of going up exceeds that of any additional downward pressure.
- SPY – Sell an Iron Condor – Nov @ 166 / 168 to 207 / 209,
- REN – Long-term buy on this small oil stock priced @ $0.50,
- OAS – Long-term buy on this small oil stock priced @ $11,
- If we lose 1913 on the S&P, I'll start scaling into some SDS. The first level of support on the S&P would be at 1913. Below that it would be 1867 and then 1800. On the upside, if the S&P gets over 1995, we’ll be headed for 2033.
- If the DXD gets over 24.14, it will be time to start shorting the DOW.
- If the FAZ gets over 13.40, it will be time to start shorting the financials.
I’m currently light – but did begin some buying this week:
- ADBE – SOLD – Iron Condor – Oct @ 75 / 77.5 to 90 / 92.5,
- GOOGL – BUY – Call Debit Spread – Oct @ 705 / 715,
o BUY – Call Debit Spread – Oct @ 650 / 660,
o BUY – Call Debit Spread – Oct @ 680 / 690,
- LL – SOLD – Iron Condor – Oct @ 12 / 13 to 18 / 19,
- NFLX – BUY – Calls – Oct @ 100,
o BUY – Calls – Oct @ 105,
o BUY – Calls – Oct @ 110,
o BUY – Calls – Oct @ 120,
- RUT – BUY – Butterfly – Nov @ 1080 / 1160 / 1230,
o SOLD – Iron Condor – Oct1 @ 1915 / 1920 to 2005 / 2010,
o SOLD – Iron Condor – Oct2 @ 1850 / 1855 to 2015 / 2020,
o SOLD – Iron Condor – Oct2 @ 1895 / 1900 to 2060 / 2065,
o SOLD – Iron Condor – Oct @ 1894 / 1900 to 2025 / 2030,
o SOLD – Iron Condor – Oct4 @ 1800 / 1805 to 2050 / 2055,
o SOLD – Iron Condor – Oct4 @ 1825 / 1830 to 2070 / 2075,
o SOLD – Iron Condor – Oct4 @ 1880 / 1885 to 2120 / 2125,
o SOLD – Iron Condor – Oct5 @ 1860 / 1865 to 2090 / 2095,
o SOLD – Iron Condor – Oct5 @ 1780 / 1785 to 2070 / 2075,
o SOLD – Iron Condor – Nov1 @ 1850 / 1855 to 2085 / 2090.
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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