This Week in Barrons – 11-22-2015:
Dear Ms. Yellen:
I remember when I was a kid. Our family rowboat needed a new coat of paint, and my father was NOT about to hire a painter. Instead, he asked around the paint stores, talked to people that did it ‘on the side’, and went ahead and tackled it himself. At 12 years old, I painted one entire side of the rowboat all by myself. It didn't seem odd or strange at the time – the rowboat needed to be painted and we were painting it.
Now let’s ‘fast forward’ to present day where that same DIY induced generation is in charge of corporations. The problem is: every executive team requires an annual pay raise, or they will move on to a different corporation. But what do you do if your corporate earnings stink, and your revenues stink even more? The only available avenue is for you to take advantage of the FED’s zero interest rate policy. Coming from a DIY mentality, you (Mr. / Ms. CEO) have the ability to financially engineer your own executive compensation structure and influence your own stock price – as follows:
- Your corporation borrows money at 0%, and sits on it a while.
- You link your executive’s compensation to your stock price by heavily paying your executives in stock options.
- You annually issue new stock options to the executives.
- You have the executives elect to redeem their options simultaneously.
- At that options redemption moment, the corporation announces a stock buyback program (roughly the size of the total executive option redemption) allowing management to redeem all of their own shares. Because earnings are a function of dividing income by the amount of shares outstanding, you also succeed in reducing the number of shares outstanding and therefore increase ‘earnings per share’.
- The key here is to ‘Get Out of Dodge’ (exit the corporation) BEFORE the debt comes due. After all, you’ve already spent the money that you borrowed to buy back your own stock. Macy’s (who’s stock price has been cut by 50% in the past 4 months) is an example of a company that is seeing it’s debt come due prior to increasing real sales and real earnings.
Therefore, due to the FED’s zero interest rate policy, private investors are buying into hundreds of stocks that have no real growth, falling sales, but manufactured earnings. If you wonder how widespread the above DIY behavior has become, just know that buybacks have hit an all time high. Factually, almost 60% of the 3,297 publicly traded U.S. corporations examined since 2010 have bought back their own stock. In fiscal 2014 the total combined net income of these companies was $847B. All the while the corporate buybacks and dividends for those same companies totaled $885B (more than all of their earnings combined). Currently, 78% of all executive compensation flows from stock options. I believe that earnings should come from innovation, production, and increased sales – not from corporations taking on billions in debt to buy back their own stock.
So corporations (in their lust for big paydays) have perverted and manipulated their own stock price. The ONLY thing a CEO cares about any more is a higher stock price. Not sales, not jobs, not production, not expansion – simply a higher stock price. And corporations are DIY’ing it right in front of you.
My family and I continue to think that every dollar we save by not having to pay someone to ‘Do It For Me’ – is a dollar we can use to enjoy the things we like. I was blessed to have been raised in a family where my dad was a hands-on guy and wasn't afraid to learn new things. I’m constantly being asked: “What is the best investment?” My answer is always: “Your best investment is education.” But let's narrow that down a bit. The best investment is learning how to DO THINGS YOURSELF. Nothing will give you a better return on your money than NOT having to pay someone else to do it.
This week we learned that the NYSE is not going to execute stop loss orders after February 2016. They are selling this idea as ‘protection’ for the masses. But, let’s play a crazy conspiracy theory forward:
- There is presently a ‘full court press’ going on out there for the FED to raise rates in December as a symbol of a recovering economy.
- The FED has (however) failed and is on the ‘look-out’ for some extraordinary event on which to blame the economic weakness and therefore start more QE.
- Starting more QE ‘out of the blue’ would be a blatant admission that their 7 years of policies have FAILED, and our FED cannot FAIL.
- The FED has pimped-up the jobs reports, changed the way GDP is calculated, and modified our inflation measurements – all to create the illusion that the economy is doing fine.
I think that the FED will hike rates in December and eliminate stop loss orders in February because the FED knows something is coming on which they can blame our ills. The NYSE has been instructed to not stop people out when the market crashes, and could (therefore) create a massive loss of wealth. I realize that I sound like a conspiracy nut, but the good news is – it will only take 3’ish months for my theory to play out.
This past week:
- Deutsche Bank reported that without buybacks, earnings in the 3rd quarter would have been NEGATIVE.
- Putin offered a $50M bounty for information leading to the arrest of who made the bomb that blew up his airliner.
- The Empire State manufacturing report came in at a NEGATIVE 10.4. A less than zero reading denotes contraction. This reading was actually an improvement over October's NEGATIVE 11.36. Collectively, these readings indicate the worst manufacturing climate since March 2009.
- The Baltic Dry Shipping index has fallen from 1200 to just 537 in recent months – showing just how slow the global economy is running. In fact, reports show that we've been sending thousands of container ships back to China - empty. Those containers were supposed to be full of goods and materials, but China doesn't need or want them.
- The BlackRock Global Ascent Hedge Fund has lost 9.4% this year and investors were notified that it would be closing. The hedge fund (which as recently as two years ago had $4.6 billion in assets under management) is now almost completely cashed out and will close due to unfavorable market conditions.
- This week we found out that simply by asking a mutual fund’s manager how much money they have invested in their own fund – is actually a very accurate gauge of the success of that fund. That is to say (according to Morningstar), mutual funds where their managers invested nothing had the lowest returns, and those in which their managers had over $1 million invested had the highest returns.
- Wal-Mart announced a new service: savingscatcher.walmart.com. You can sign up for free, and anytime you buy something at Wal-Mart you put the TC# at the bottom of the receipt into the ‘savings catcher’ website. Wal-Mart will then automatically compare the items you bought to other stores in the area and if anything you purchased can be found for less somewhere else, they pay you the difference.
Whether you’re talking stocks, bonds or commodities, strange things are happening all around the globe. For example, in the gold arena I’m seeing 300 paper contracts being written for every single ounce of physical metal. This is an accident waiting to happen in the precious metals pits because the major bullion banks appear to be moving their physical gold away from the exchanges. A similar situation exists in silver – so one small spark and the precious metals could indeed be off to the races.
This week David Tepper, David Einhorn, and Stanley Druckenmiller reminded us that the market has no business being up where it is. All three of these major hedge fund players have backed away from the market – many of then reducing their exposure by over 30%. The market run-up from the August lows topped out at 2109 on the S&P. We closed Friday at 2089, a mere 20 points from that short-term top. I suspect the 2109 level will become a fairly formidable resistance area once again.
This week we have a short week as the market is closed on Thursday, and only open a half-day on Friday. Monday through Wednesday will encompass 90% of this week’s trading volume, with just 10% being saved for Friday. I expect volatility will be ‘in the air’ for sure. But allow me to get a jump on the festivities by wishing safe travels for all of you going to see loved ones. Do enjoy yourself and give thanks for being as blessed as we are. Eat, drink and enjoy each other’s company – because in the end, that is really all that matters. Please take care, be safe, and have a Happy Thanksgiving.
- The market will drift higher this week due to the Put/Call Ratio, the Skew, the Trin, and the VIX all being neutral,
- Crude oil will go lower to $31/barrel (currently @ $41.46),
- I will buy FOLD > 10.75,
- I will buy TRV > 116.48, and
- I will buy EA January Calls and finance them by selling some ‘in the money’ PUT options.
- Long various mining stocks: (AG, AUY, EGO, GFI, IAG, and FFMGF),
- Short the Euro via owning PUTS on FXE,
- Long the FANGs (Facebook, Amazon, NetFlix and Google),
- Long the RUT, January, Broken-Wing Butterfly (1100 / 1180 / 1250),
- Long the IWM, January, Broken-Wing Butterfly (109 / 117 / 124),
- Sold the SPY, Dec4, Iron Condor (190 / 195 to 216 / 218), and
- Sold the NDX, Nov4, Call Credit Spread (4750 / 4760).
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.