This Week in Barrons – 8-30-2015:
Boss: Dilbert, I’d like you to be more entrepreneurial.
Dilbert: Should I take huge risks, act like I have no boss, and be rewarded with billions if I succeed?
Boss: Nope – just give me your great ideas. I’ll take complete credit, and will decide if and when we do anything.
Dear Ms. Yellen:
This Labor Day weekend I believe that we are in a silent, economic war. We all know about the Russian sanctions, the BRIC (Brazil, Russia, India and China) alliances, and the BRIC Development Bank. What is not public knowledge is the Chinese Asian Alliance Bank, the non-U.S. dollar relationship between China and Saudi Arabia, and the non-U.S. dollar payment system that Russia and China are currently testing. Taken in isolation, the following situations appear non-connected. However, when considering them as part of a larger plan and their ‘unintended consequences’ – is when it gets interesting.
- Ms. Yellen, remember when ‘Dilbert’ suggested capping the price of gold and silver so that China wouldn’t dump our treasuries, and would then be accepted into the IMF’s SDR currency reserve basket? Well, these same metals have now ‘turned the tables’ on you. Demand is ‘off the charts’ and physical supply is non-existent. Logically that would tell you that prices should be rising. The reality is that future prices for gold and silver are LOWER than current prices. The only way this is possible is for you to be fighting an economic war against the metals and price fixing.
- In terms of oil, remember when ‘Dilbert’ suggested that the Saudis increase production in order to hurt the Russian economy. Unfortunately, the excess supply that was created is all but ruining our internal oil exploration and fracking industry. The unintended consequence of increased oil production was oil plunging to levels lower than expected, and staying there longer. The next consequence will be the financial default on half a TRILLION dollars worth of imploding derivatives based upon a set, higher price for oil.
- Remember when ‘Dilbert’ suggested promising China that they would be included in the SDR reserve currency basket, and then the IMF did an ‘about-face’ and postponed their involvement for a year. Correspondingly (days later) China dumped $100B in U.S. treasuries and devalued its currency? Then (days later) the 10th largest port in China exploded in what can only be called a micro-nuclear blast.
- It’s also convenient that days after Thailand devalued their currency; Thailand experienced the worst ‘bombing’ event in their country’s history.
- As for Russia, I’m sure you know that Putin has drafted a bill that aims to eliminate the US dollar and the Euro from all trade between the CIS countries (Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries of the former Soviet Union).
- And in China, the Chinese Central Bank just launched a pilot two-currency (ruble and yuan) program in Suifenhe City, Heilongjiang Province. This augments their 2014 Russian Central Bank / People's Bank of China 150B Yuan currency swap agreement.
Ms. Yellen, it seems that you’re in a silent, economic war to keep ‘King Dollar’ intact. If that means bombing ports in China – so be it. If that includes capping the price of gold and silver (despite record demand) – no problem. The main issues surrounding silent, economic wars are the unintended consequences. Just ask the bankers holding the paper on the half-TRILLION dollar oil derivatives and the corresponding loans on fracking industry equipment. Ask them if they liked you telling the Saudis to increase production in order to cripple Russia? As an example there was Hercules Offshore, who sold $300M in oil exploration bonds in early 2014. When you caused oil to fall like a rock – their profits fell by 70%. They were forced into bankruptcy, and the banks holding their $300M in paper received 5 cents on the dollar. #ThanksObama.
Remember when ‘Dilbert’ suggested that the new King of Saudi Arabia meet with Obama in the White House? Well, Friday that came true. Maybe you can tell me if the new King took the opportunity to inform the President that Saudi will now accept the Yuan and/or the Ruble for oil (without converting them to U.S. dollars first). If that agreement is made – I’m assuming we will see the lights flicker in your Washington apartment, and ‘Dilbert’ will be soon joining the ranks of the unemployed?
On Friday the market tanked on the newest jobs report which told us:
- Of the 173,000 jobs created in August, 69,000 (40%) were part-time.
- 94M Americans (out of 340M) have ‘left the workforce’.
- For the first time since 2013, the number of manufacturing jobs FELL.
- The U6 unemployment rate came in at 10.3%. This U6 number excludes people that have been looking for work longer than one year. Yes, that means that these ‘long-term’ discouraged workers are no longer counted.
- If we counted the long-term, discourage workers – the U6 unemployment rate would be over 20%, and the U3 rate (the 5.1% that the government publishes) would be 10.8% instead.
But what about the rate hike? The only way that the FED can keep their propaganda string in tact is to go ahead and raise interest rates. You can't have a strong economy and a zero interest rate policy. The two do not go together. And if you lived in a ‘normal’ world where the economy was strong, you need to ‘normalize’ interest rates. If the FED doesn’t raise rates, it becomes instantly clear that everything they've told us is pure horse manure. So to keep their illusion alive (while they wait for a major event on which to blame our economy) the FED has no choice but to toss out a quarter point rate hike on the 16th.
The only element that would remotely hold the FED back is the falling and volatile stock market. But I’m thinking along lines of propaganda, not reality. If the FED stalls and says that they don't want to hurt the market, they prove to the world that their reason to exist is to help Wall Street. For the past several weeks, FED heads have been parading around the country suggesting that the FED can't worry about the market, but rather must respond to the economy.
Lately when I think of the FED, visions of Tokyo Rose and Baghdad Bob come to mind. As island after island fell to the American forces in WWII, Tokyo Rose (the voice of Japan) would continue to talk of the great conquests the Japanese army was enjoying and how Americans would soon have to surrender. Baghdad Bob was the voice of Iraq. All during the American occupation, he told tales of American forces being slaughtered at the airport, and there's no way they'd ever seen an American in their city.
Our FED is behaving in a similar fashion. Remember when everyone was convinced that the FED would never taper to zero, and some actually were looking for more QE? The FED did indeed taper to zero, asking for zero emergency assistance, and all the while playing the propaganda violin. Our FED refuses to be held responsible for crashing the economy, and certainly for not knowing how to fix it. So, since they can't fix it, they have to act as though they have. Therefore, it’s my guess that we receive a 25 basis point hike in interest rates on the 16th of September.
If the FED doesn’t raise rates on the 16th, the market is going to feel they're safe until December and bounce higher. If the FED does raise rates, we could see anything from a 500-point dump, to a 300-point romp, depending on how they ‘spin’ their commentary. But we also have long-term economic cycles that are coming together in September, the Biblical Shemitah arriving in 6 days, the Pope visiting the White house, and the ending of Jade Helm. All will add to this market’s volatility – which is higher than I can remember. Since Friday, August 21st, the average DAILY range for the S&P has been 2.8%. This is incredible, when you consider that we traded within a 1% range for the 6 previous months.
This is a tough atmosphere to trade because the moves are over-sized and often occur during the pre-market hours. My suggestion for the next couple of months would be to ‘sit out’ this market. Frankly without a new QE program of some sort of stimulus, I cannot see the market making new highs. I can however give you dozens of reasons why we could go considerably lower. That said, depending upon the FED’s next moves, I might start taking some long term short side plays such as long dated puts and some inverse ETF's.
Enjoy the Labor Day Holiday with your family and friends. Enjoy some ribs, BBQ and a refreshing drink. Life will catch up with us again on Tuesday morning.
Areas of support:
- DOW: Look for a weekly range of 15,750 to 16,620. It was down 540 points this week, and down almost 10% for the year.
- NASDAQ: I’m looking for large volatility, and expecting the range to be between 4639 and 4827. It was down 140 points on the week, and 1% for the year.
- SPX: I’m looking for a wedge formation and a consolidation around the 1940 area. It was down 67 points on the week, and almost 7% for the year. I would expect a trading range between 1892 and 2003 for this coming week.
- RUT: Unlike the other indices, the broad based Russell is not looking strong. However, it could be building a base in the 1115 – 1181 range heading into the FOMC meeting. It was down 26 points on the week, and almost 6% on the year. A ‘No Rate Hike’ decision could bring a flood of order flow into the market and send this index higher. If we get a hike and a perception of tightening going forward, this index will indeed break to the downside. I think all of the panic sellers are out for now, and no one is willing to put more new-money into the market until after the FOMC meeting.
- When examining the sectors: Energy (XLE = Bearish), Financials (XLF = Bearish), Utility stocks (XLU = new lows = Bearish), Basic Materials (XLB = Bearish), Consumer (XLP = poised on support), Consumer Discretionary (XLY = poised on support), Industrials (XLI = Bearish), and Healthcare (XLV = headed lower) – so it’s easy to be ‘Bearish’ in the short-term.
- Goldman Sachs (GS): BUY SEPT $185 Puts, SELL SEPT $180 / +190 Call Credit Spread
- Nasdaq (NDX): SELL Sept2 $4170 / +4270 Call Credit Spread
- S&P (SPY): BUY SEPT $195 Puts
- REN – Long-term buy on this small oil stock priced @ $0.50
- OAS – Long-term buy on this small oil stock priced @ $11
I’m currently holding (notice the Calendars bought as hedges):
- AAPL – BOUGHT – Diagonal – Sept -130 Calls / Oct +135 Calls,
- IWM – SOLD – Iron Condor – Sept5 @ 110 / 112 to 122 / 124,
- LJPC – BOUGHT – Sept $30 Calls,
- MDY – SOLD – Iron Condor – Sept4 235 / 240 to 270 / 275,
- MSFT – BOUGHT – Oct $31 Puts,
- QID – BOUGHT – Sept $37 Calls,
- RUT – SOLD – Iron Condor – Oct 1090 / 1100 to 1250 / 1260,
- SPXPM – SOLD – Iron Condor – Sept @ 1885 / 1890 to 2090 / 2095,
o BOUGHT – Calendar – Sept / Oct @ 1950,
o BOUGHT – Calendar – Sept / Oct @ 1980,
o SOLD – Iron Condor – Sept2 @ 1820 / 1825 to 2020 / 2025,
o SOLD – Iron Condor – Sept2 @ 1955 / 1960 to 2070 / 2075,
o SOLD – Iron Condor – Sept @ 1925 / 1930 to 2025 / 2030,
o SOLD – Iron Condor – Sept @ 1935 / 1940 to 2035 / 2040,
o SOLD – Iron Condor – Sept @ 1965 / 1970 to 2035 / 2040,
o SOLD – Iron Condor – Sept4 @ 1900 / 1905 to 2040 / 2045,
o SOLD – Iron Condor – Sept4 @ 1925 / 1930 to 2075 / 2080,
o SOLD – Iron Condor – Sept4 @ 1955 / 1960 to 2090 / 2095,
o SOLD – Iron Condor – Oct1 @ 1895 / 1900 to 2055 / 2060,
o SOLD – Iron Condor – Oct1 @ 1905 / 1910 to 2055 / 2060,
o SOLD – Iron Condor – Oct1 @ 1915 / 1920 to 2170 / 2175,
o SOLD – Iron Condor – Oct1 @ 1925 / 1930 to 2170 / 2175,
o SOLD – Iron Condor – Oct2 @ 1850 / 1855 to 2060 / 2065,
o SOLD – Iron Condor – Oct2 @ 1895 / 1900 to 2060 / 2065,
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 2200 / 2205,
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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Until next week – be safe.