This Week in Barrons – 10-4-2015:
Janet, does ‘data dependent’ really mean QE4?
Dear Ms. Yellen:
Based upon Friday’s Jobs Report, it’s now clear to me why you didn’t raise rates:
- The U.S. economy created 29% FEWER jobs in September than were anticipated, and most of those were ‘phantom’ jobs – invented by a statistical ‘birth/death’ model. Along with that horrific number, August was also revised lower by 27% fewer jobs.
- The U.S. private payrolls for September were 40% BELOW estimates, with August being revised lower by 28%.
- 500K more people dropped out of the work force as the participation rate FELL to its lowest level in almost 40 years.
- Factory goods orders for August FELL a greater than expected -1.7%.
- In the 3rd Quarter, U.S. companies announced 205,759 job cuts – the most since the Great Recession, and double the same time last year.
- Last month, companies authorized $243.4B in stock buybacks – over 7 TIMES last year’s rate.
- Canada is in a confirmed recession, with the EU and China not far behind.
- [A shout-out to SF for the above numbers.]
But you did have a crazy September to deal with:
- The Pope addressed Congress for the first time in history.
- Donald Trump lead the GOP polls, while Speaker Boehner resigned.
- The Chinese President and Putin both met with Obama.
- You were expected to raise rates – you didn’t – and later said you would.
- Hillary Clinton lost ground to an openly declared Socialist.
- Volkswagen blatantly cheated on the EPA emissions requirements.
- And the Iranian deal passed Congress, as Iran chanted ‘Death to Israel’.
Obviously Ms. Yellen, your rate hike is now off the table. In fact the latest talk surrounds QE4. The only mathematical solutions I see to avoid QE4 are:
1. The government increases tax revenues, reduces deficit spending, and therefore reduces bond auctions.
2. The government cuts spending, reduces deficit spending, and therefore reduces bond auctions.
3. The FED raises rates to make bonds more attractive, and to generate enough buyers that the FED no longer has to participate in the auctions.
4. Or the FED starts printing money.
I think we can all agree that the only probable element on that list is #4 – you turning on the printing presses. But how many times can you go back to the QE-well? After 7 years of QE, a $4 Trillion balance sheet, billions in bailouts, TARP, HARP, cash for clunkers, and all of the other illusions that you’ve manufactured – is your ‘data dependent’ phrase really going to translate into QE4?
The world saw your fiscal actions on Friday. After the worst jobs report in years, the market was immediately down over 250 points. And just as the market was challenging the August lows, you (the ‘Plunge Patrol Team’) stepped in and pushed the market higher by 200 points. At least we now know that the FED/Goldman line in the sand is the 1867 level on the S&P. If the market falls below that level, it's a long way down. Unfortunately, J. Q. Public doesn't know levels, what durable goods are, ISMs, or PMIs. He doesn't hear the ‘factory orders recession warning’. He doesn't know that the Atlanta Fed cut their GDP estimates for the year to a measly 0.75%. But he does know that you’re playing a very dangerous game of musical deck chairs – on the Titanic.
UBS (in return for immunity) is about to ‘rat out’ its peer banks about manipulating the gold and precious metals market. Now, combine UBS coming clean next year about gold manipulation – with China backing their Yuan with gold – with China being admitted to the IMF’s SDR program, and you have a recipe for higher gold and silver prices.
But you’ve heard that all before so let me introduce some more information:
- The supply of gold is thin, but the supply of silver is non-existent.
- The bankers are going to be exposed for price manipulation.
- The equity markets are taking it on the chin because everyone finally realizes that QE and buy-backs are the only reasons stocks go up.
- The FED doing QE4 will directly translate to devaluing the dollar.
- The Chinese backing their Yuan with gold, makes every other nation looks bad.
I really like silver at this price because silver (unlike gold) is used for: money, jewelry, and in industry. Silver is used in solar, in space applications, in electronics, in medicine, and in dozens of other industries. But, many silver mines have gone idle, and the physical amount available has diminished sharply. This week I talked to silver and gold dealers and unanimously heard that they have never seen physical silver supply and demand so ‘out of whack’. Demand for physical silver is exploding. Wholesalers are depleted, and refiners are talking 3-month lead times to ship product. And yet the ‘paper price’ continues to be held down. I believe we are nearing a point where the physical demand will blow-up the paper market manipulation.
This miss-match in silver supply and demand is an opportunity. The opportunity I see is an options trade in a very specific mining stock. This same situation presented itself back in 2010 – where an investment of about $10k would have turned into $250k in 24 months. The stock is AG – a silver miner that also does a little gold mining. It’s currently trading for $3.58/share. AG is a good company, but the miners have been crushed during the last 4 years of metals manipulation. I’m basing this idea on the concept that: (a) AG survives, and (b) because physical silver is now almost impossible to get, we are nearing a time when the paper market has to break. I’ve selected AG for two reasons: (a) as recently as October of 2012 - AG traded for $24, and (b) they have $2 call options available in January of 2018. Buying a $2 call option would give you the ability to buy AG stock between now and January 2018 for $2 per share. The current price for that option would be $2.20. Now you could just buy a few options, hold them, and as the silver manipulation comes to an end – cash in on the appreciation of those option contracts. But a way to make a lot ‘more money’ is the following:
- Buy 50 contracts of the January 2018, $2 calls options for $2.20.
- As silver rises, and AG hits $5/share, our $11K in options will be worth $20k. We will then sell our 50 contracts, and use the gains to buy 100 contracts at the $5 strike price.
- As silver rises, and AG hits $10/share, our 100 contracts will be worth $53k. We will then sell our 100 contracts, and use the gains to buy 250 contracts of the January 2018 $10 strike.
- As silver rises, and AG hits $15/share, those 250 contracts are now worth about $132,000. Sell those 250 contracts, and buy $100k worth of the January 2018 $15 strike.
- As silver rises, and AG hits $20/share, you will have made $250k on your $10k investment. You could even roll it out again, and have $500k when AG makes it to $25/share.
So the only real question is: ‘Can AG go from $3.58 to $20 in less than 2.4 years?’ The miners did similar things in the past, and there's even more reason for them to blast off this time if silver manipulation ends. But honestly, if AG just goes from $3.58 to $6 you will still double your money. This investing model is scale-able. You don't have to start with $10k, you can simply buy 10 contracts for $2,200 or 1 contract for $220. The math is the same – simply adjust your ending dollar amount based upon your investment.
Nothing is guaranteed, but this was the exact same strategy that worked in 2010 to 2011 in the miners. I think because we have so much time – this could work again. Remember, UBS is going to blow the lid on metals manipulation, and – there is NO more physical supply of silver.
- INDU 16,472: A move into 16,600 would be normal.
- NDX 4267: A move into 4,400 could trigger a top.
- SPX 1951: Watch the 1960 level for a topping pattern.
- RUT 1114: The Russell is under-performing the rest of the market, and I need to see a solid move into 1160 to signal any kind of rally.
- NFLX – NetFlix is currently trading @ $106.11. It’s old high was $129.29. It has earnings coming up on October 14th – therefore volatility in the stock itself will be increasing. With volatility increasing, call options will increase in value even if the underlying stock value remains the same or slightly lower. NetFlix was at $101 prior to its July earnings report – when it shot up to $129 after earnings. If you are a conservative investor, purchasing some ‘in the money’ $105 NFLX call options might be appropriate. For the more adventurous investor, purchasing some inexpensive ‘out of the money’ $120 call options would certainly be rewarding in the event of NFLX going back to its old highs.
I’m still light – but buying more and more NFLX and AMZN heading into earnings:
- ADBE – SOLD – Iron Condor – Oct @ 75 / 77.5 to 90 / 92.5,
- AMZN – BUY – Calls – Oct4 +515 / -530 Call Debit Spread
- LL – SOLD – Iron Condor – Oct @ 12 / 13 to 18 / 19,
- NFLX – BUY – Calls – Oct @ 100, Oct @ 105, Oct @ 110, Oct @ 118, Oct @ 120,
- NKE – SOLD – Iron Condor – Oct 112 / 115 to 129 / 132,
- YHOO – SOLD – Call Credit Spread – Oct -32 / +35
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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