RF's Financial News

RF's Financial News

Sunday, October 25, 2015

This Week in Barrons - 10-25-2015

This Week in Barrons – 10-25-2015:


Layoffs … you’re talking about … Layoffs!

Dear Ms. Yellen:

It’s been almost 14 years since Jim Mora (at an Indianapolis Colts press conference) uttered those words.  They had just lost a terrible game, some reporter asked about their ‘playoff’ chances.  I thought it appropriate that after such an ‘unexplainable’ week in the markets – that I ask about all of the employee ‘layoffs’.  Obviously, after a certain point the math no longer works on the: ‘borrow money to buy-back stock’ shenanigans.  Just this week it appears that corporations figured that out as well, as they started cutting people (in earnest) to improve their bottom lines.  A few of the layoffs that were announced are: 3M for 1,5000, Advanced Micro Devices for 500, BioGen for 1,000, Caterpillar for 5,000, Chesapeake Energy for 1,000, Chevron for 7,000, ConAgra Foods for 1,500, Credit Suisse for 3,400, Disney for 300, FMC for 1,000, Hewlett Packard for 30,000, Lockheed Martin for 250, Monsanto for 2,500, Microsoft for 1,000, Perrigo for 1,000, SunEdison for 1,200, Twitter for 325, Wal-Mart for 450, Weatherford for 3,000 and Whole Foods for 1,500.

These same corporations are using the ‘proposed’ savings from these layoffs to continue to buy-back their own stock.  I think this practice is dangerous.  For starters, if a company’s sales are not increasing – then chances are the buy-backs won’t work either.  Secondly, it’s possible that the buy-backs won’t reduce the overall share count due to the new shares being created and used as compensation to the executives.  Finally, with increased layoffs come declines in retail sales.  And something that SF pointed out, the average FICO credit score for loans originating in September is at its lowest level in at least 4 years.  That means we’re combining bad credit, with lower lending standards, with retail sales and transportation declines – yielding a recipe for a fairly sick economy.

Ms. Yellen, what do you get when you put the following together:
-       32 nation’s Central banks are cutting their own interest rates.
-       China’s GDP is expanding by 6.9% yet they are devaluing their currency, reducing their imports by 20.4%, and jailing people for talking negatively about stocks.
-       The oil industry rig count is down 1,001 rigs over last year.  The ripple effect comes from all of the banks and loans associated with these (now) non-performing rigs.
-       Caterpillar has seen its global sales fall for 3 straight years, and in their latest report not a single area of the globe was positive.
-       Denmark’s negative interest rates have pushed real estate to a point that rents are now up 60%.
-       Obamacare costs (and premiums) are increasing by double-digits.
-       European Central Bank (ECB) President, Mario Draghi signaled that more stimulus is on the way, and suggested negative interest rates.
-       The Bank of Japan is ramping up its largest asset-purchase program (including buying into their own stock market).
-       England’s interest rates are at record lows.
-       And not to be outdone, China’s central bank announced another rate cut.

Ms. Yellen, it’s YOU against the rest of the world right now.  As soon as you announced the end of QE3 and began setting rate hike expectations – the U.S. dollar started to rally.  But what comes with a higher U.S. dollar is increased difficulty selling U.S. goods and services overseas.  In this case, a competitive environment means that you need to DEVALUE your currency to make the products you are trying to export more attractive.  It’s a ‘Race to the Bottom’.   Devaluing creates inflation, and that is exactly what you want.

Therefore, with China’s interest rate cuts, Draghi’s radical announcement of negative interest rates, combined with Japan’s central bank actually buying stock market securities – what is becoming a higher probability is that you need to choose your poison: QE4 or negative rates.  FYI – in 2001 the Colts did NOT make the playoffs.  Let’s try and not make the same mistake with our economy.

The Market:

This week has certainly been one for the history books.  I haven't seen this level of lunacy in the markets since the late 90's, and since the housing run-up in 2006.  I remember in late 1999 when stocks were gaining 200 points in a day.  It was a ‘new paradigm’.  Nothing mattered until the NASDAQ lost 60% of its value virtually overnight.  More than 100 companies that had stock prices at $100+ per share went belly-up.  This melt-up is even worse because every COUNTRY is racing each other to the bottom.  Recorded history has never seen zero or negative interest rates, and words like ‘new paradigm’ are being used again.

Just last week some very smart people were calling for a market crash by the end of 2015:
-       Gerald Celente of Trends Journal and Bo Polny said on Oct14th: “Heading into November cycles suggest a massive crash taking us down as much as 70% is possible.”
-       Graeme Irvine suggested:  “For better or worse, there is a massive sea change underway in global politics.  An unprepared voting public is desperate, disillusioned, and mostly unaware of the cause of the decline in their lifestyle.  Stay long physical gold and silver. Globally we seem, to have run out of road and talent.”
-       Nomura's Bob Janjuah remarked:  “I did not expect such a strong upside move in response to such bad data!  I would not be surprised to see attempts to recapture the highs of the year if the 2020 level holds.  And a weekly close in the S&P below 1970 would put 1820 and the low-1700’s back on the radar.”

Every tick of this market is now being managed by the Central banksters.  I know it sounds James Bond’ish, but on a daily basis I’m seeing "Unidentified" accounts buying tens of millions of index futures JUST when a market is starting to sag.  

Right now we have a ton of fund managers ‘chasing returns’ because they need their year-end bonuses, and have terrible performance year-to-date.  We have Central banksters who know that their economies are on the ropes.  This is a bad earnings season, with most big banks missing both their top and bottom lines.  One common theme (however) is a lower forecast.  Some forecasts have been lowered based on the dollar and world trade, others have been on contracting sales growth.  It’s the sales (top-line) story that’s important to me because it is where the ‘rubber meets the road’.  With today’s accounting practices, bottom lines can become distorted.  For me, I would always rather see top-line growth in revenue, even if bottom line profits shrink.  Share buy-backs, lowered forecasts, a weak job market, and a strong dollar (disinflationary) environment – are all reasons that our FED will NOT be raising rates any time soon.

I’m watching the Russell (RUT) Small-Cap Index.  Currently it has been unable to rise above the 1180 area, and this tells me that the general market order flow is not really buying into this rally – yet.  The Russell has been in a bear market since July, and we have not had any higher highs.  Getting above 1180 on good volume is key to proving that money is flowing back into the market as a whole.  If the Russell has problems moving higher and revisits the 1140 area, then I think we could see selling pressure across all of the other indices.

I am still leaning toward this rally ‘petering out’ and sliding downhill.  I know that means doing battle with the strongest time of the year, fund managers that are desperate for returns, and Central banksters that want things to go up.  I get all that.  But I think they lack the fuel to keep it going.  Time (obviously) will tell.

So on one side of the ledger we have: (a) funds are down for the year and desperate, (b) we're entering the strongest period of the year, (c) we've had a 10% correction, (d) the technicals have improved, and (e) rate hikes are now a myth – unless the FED decides to crash the market.  On the other side of the ledger we have: (a) the real economy is in the toilet, (b) the world economy is in recession, (c) zero rates have perverted everything, (d) debt has increased dramatically, (e) earnings are lousy, (f) world currency wars are raging, (g) over a hundred million are NOT in the labor force, (h) record numbers are on welfare, and (i) top-line revenue misses have become the norm.

Of course this rally is based on easy money, not strong earnings or a strong economy.  Remember correlation is NOT causation.  The market is not a measure of the economy, nor is the market a measure of the business fundamentals.  We are in a midst of declining revenue and sales forecasts, yet we are in the middle of a stock market rally.  This is a FED-induced rally.  Don’t fight the Fed.  But don’t get fooled into believing it is anything other than what it is.  People get hurt when bubbles burst, but get destroyed when they don’t know WHY or HOW the bubbles were created.


RUT 1165:     If we can break above 1180 and close above it, it might signal the end of the bear market that has been with us since June.  We could have a FED-fueled rally into year-end.  Not a Santa Claus rally, but rather a FED rally.  If the Fed starts talking or hinting at easy money policies – we could move higher.  If they actually launch another easy money program – we could rocket higher.

Now, if the FED actually launches an easy money program – look at the precious metals and the miners.  The bulk of them are so beaten down, that even if they went out of business – the most you could lose is $2 or $3.  AUY is $2.52, GFI is $2.89, EGO is $4.09, and IAG is $2.11.  But the most attractive part of the mining space is that they have options.  With their stocks being so inexpensive, you can buy a 1 year + 3 month option on many of these stocks for pennies.  Take IAG for example: the January 2017 $1.50 call options are going for around $0.85.  That means you have the right to buy IAG for $1.50/share all the way out to the 3rd Friday of January 2017.  If our FED introduces a program to devalue the dollar – then silver is back up to $25/ounce and IAG is back to $5.

I’m still light – but buying more and more of the miners and FFMGF:
-       AG – BOUGHT Stock @ $3.58 / and Jan, 2018 $2 Calls @ $2.30
-       AUY – BOUGHT Stock @ $2.50 / and Jan, 2017 $2 Calls @ $0.90
-       EGO – BOUGHT Stock @ $4.00 / and Jan, 2017 $3.50 Calls @ $1.10
-       GFI – BOUGHT Stock @ $2.80 / and Jan, 2017 $2.50 Calls @ $0.90
-       IAG – BOUGHT Stock @ $2 / and Jan, 2017 $1.50 Calls @ $0.85
-       FFMGF – BOUGHT Stock @ $0.33
-       SPX:
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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