This Week in Barrons – 8-30-2015:
This market is like a roll of toilet paper: the closer it gets to the end - the faster it goes.
This is not about fear or a coming collapse – it is simply the long and tested motto of the Boy Scouts, “Be Prepared!” The market roller coaster will continue until we get to the FOMC meeting on September 18th. The market requires certainty and vision as to what the Fed will do, and where they see it moving forward. Their ‘data dependent’ message has kept everyone guessing longer than necessary.
This weekend, the FED and other central bankers are attending their annual Jackson Hole retreat. Historically this meeting has often given us a glimpse of the FED’s concerns and their willingness to adopt new policies. Thus far, I have not heard anything to suggest a confirmed rate hike or QE4. Yes QE4. Remember it was The Ben Bernanke that planted the seeds for QE2 at the 2010 Jackson Hole summit. The probability of a QE4 has gone from less than 1% to over 18% this past week. It may be improbable, but not impossible – so ‘Be Prepared’.
Last week the markets dropped over 5% in a week. Historically speaking:
- The first week after a 5% weekly drop – the averages remain flat.
- The second and third weeks – the averages gain 1.65%.
- And over the next 12 weeks, the averages historically return over 5%.
‘Be Prepared’ for more Chinese devaluation. When the IMF embarrassed the Chinese by suggesting their currency wait another year to be implemented into the SDR basket, it was just a couple days later that China pulled the devaluation card. China was all but promised the Yuan being a part of the SDR basket this year, and they were fooled. Well, you shouldn't fool a nation that own trillions of our own dollars. But they didn't stop with currency devaluation. This past week China started dumping U.S. Treasuries. Since the start of the year until mid-August, China has sold about $105B worth of U.S. Treasuries. In the last few weeks they have sold an additional $100B. So, who's buying? You can bet it's the FED and their Central Bank buddies. A nation like Belgium may be the temporary storage facility for the treasuries, but you can bet that it’s our FED themselves (directly and indirectly) that is doing the buying.
Given China has a lot more U.S. Treasuries to sell; this could be the start of the great China un-wind. At what point does the tsunami of treasuries become too great? I don’t know, but I suspect we are going to find out. And what then does the FED do? They will continue talking about how our economy is solid and employment is great, and if need be – they can do QE4. On a more ‘truthful’ side, the Atlanta Fed came out this week and said they only see economic growth of 1.2% this year. So we have got China dumping U.S. Treasuries and a slowing economy – what else could go wrong?
Glad you asked. China remains the world’s manufacturing hub – especially in so far as ‘smart products’ are concerned. At last week’s DEF CON Conference, a talk was given by the Brinks Corporation (the makers of armored trucks and safes) concerning their new ‘Smart Safe’ – the world’s ONLY unbreakable safe. It comes equipped with a Windows operating system and a USB port. It took hackers less than 30 seconds to ‘break into’ the safe using products found at BestBuy. This is Brinks – a really good ‘safe’ company. So you can imagine my fear when the world starts buying smart refrigerators, washing machines, and microwave ovens – which all have access to your own personal Wi-Fi network. They could all talk to each other, the manufacturer, and anyone else who will listen. So please – ‘Be Prepared’.
This week got everyone's attention because not only did we have a 1089-point crash on Monday, but also a 900+ point gain on Wednesday and Thursday. That was the biggest two-day gain in market history. Which begs the question, is this a buying opportunity or are we in a correction. The recent action has not only made investors gun-shy, but has potentially woken them up to just how large a factor the FED really is in our economy. Investors are facing the investment dilemma of a lifetime due to massive FED ‘interventionism’. Reviewing the investment options:
- Bonds – The 10-year bond is paying 2%, and inflation is running around 1.8%; therefore, you will not make any money – but you’ll be safe.
- Cash – Cash is king when it’s strong, because it allows you to buy things cheaper than you would normally. So ‘buying stuff’ works right now.
- Real Estate – With strong rental demand and high rents relative to mortgage interest, it remains a great, inflation-protected investment.
- Commodities – Gold and silver are two of the more common commodities for long-term inflation protection. Don’t buy them as an investment, but rather as an alternative inflation hedge.
- Equities – Stocks are where the action is, but remember to hedge your positions.
But aren’t stocks in a bubble right now? Absolutely, but there’s nothing wrong with investing as long as you KNOW it’s a bubble – and you are able to hedge your positions. We can’t fight the bubble. As much as I may disagree with FED policy – they are driving the train. In the long-term, this is going to end very badly (just like the Dot.com and Housing bubbles) with a massive downturn and implosion. However, during the Dot.com bubble, you couldn’t talk reality with those who ‘believed’. Each year the market would rally, and new IPOs would rocket to the moon. The housing bubble was exactly the same. The Kool-Aid drinkers always ignore the math.
The math is easy: Revenue – Costs = Profit (or Loss). But, when you replace Revenue with borrowed money (margin) to subsidize your costs, it seems like everything is fine. When the ability to borrow ends, and you are no longer able to cover your costs – then the house of cards collapses. In the Dot.com bubble it was the Venture Capital firms and investment banks that stopped lending. In the housing bubble it was banks and mortgage companies that stopped lending. This time it is the FED who has printed and bought TRILLIONS in bonds and mortgages (and continues to do so to this day) that will stop lending. But how long can this go on? The Dot.com bubble inflated for 4 years before it burst. The housing bubble was 5-6 years in the making. The FED’s bond bubble has been 5 years, and (I believe) has some room to grow.
Let me end with this. I'm on record as saying that the market topped back in May. And as long as we don’t get some sort of perverted form of stimulus like QE4, I don’t believe that we can regain those highs. But at this point, I think the question should be how LOW can we go? All is not well, and yes we're going to see more volatility. For the foreseeable future, it will be all about trading the bounces both up and down.
This coming week will focus on the Friday jobs report. Like every first Friday of the month, we all will have to sit with ‘baited breath’ to hear what they say happened to the employment situation for the previous month. That will capture a majority of this week’s trading chatter. And (after all) we have already recouped over 100 S&P points from the big sell-off. That's a lot without a pause, and there's a decent possibility that this initial bounce has already run its course. Because even if you're a bull, the common thinking on a big pull-down is that we bounce and then fade back to ‘test’ the strength of the lows. So even the most bullish are comfortable with the idea that we could easily start sliding back down sometime in the near future. I tend to think that this will happen sooner rather than later. And after a 900-point bounce, I think that we only have about one more day (if that) before we peel some of these gains back off.
The key to investing over the next several months is that being nimble will be your friend, and don't marry anything. The ‘talking heads’ will say that you were just given a discount on your favorites; therefore, back up the truck and load-up. Remember, they were saying those same words in early 2008, as the market fell from 14,000 down to 6,600.
In terms of index levels that I’m watching this coming week:
- NDX 4400 (presently 4329): If we can get back above 4400, this level would then act as support for a run higher. Anything between the 3800 and 4400 spells volatility – so ‘Be Prepared’.
- SPX 2040 (presently 1989): We will either push the index back up into the 2040, or renew the selling pressure back down to the 1880 level.
- RUT 1150 (presently 1163): The good news about the Russell Small Cap Index is that it never broke down to the September 2014 lows. The bad news is the current bounce is not nearly as strong as the other indices. This shows order flow trepidation, and that broad base money is NOT seeing this market as a buying opportunity, just yet.
I’m currently holding (notice the Iron Butterflies and Calendars bought as hedges):
- AAPL – BOUGHT – Diagonal – Sept -130 Calls / Oct +135 Calls,
- IWM – SOLD – Iron Condor – Sept5 @ 110 / 112 to 122 / 124,
- MDY – SOLD – Iron Condor – Sept4 235 / 240 to 270 / 275,
- RUT – SOLD – Iron Condor – Oct 1090 / 1100 to 1250 / 1260,
- SPXPM – SOLD – Iron Condor – Sept @ 1885 / 1890 to 2090 / 2095,
o SOLD – Iron Butterfly – Sept1 @ 1880 / 1930 to 1930 / 1980,
o SOLD – Iron Butterfly – Sept1 @ 1770 / 1820 to 1820 / 1870,
o BOUGHT – Calendar – Sept / Oct @ 1950,
o BOUGHT – Calendar – Sept / Oct @ 1980,
o SOLD – Iron Condor – Sept1 @ 1825 / 1830 to 2070 / 2075,
o SOLD – Iron Condor – Sept2 @ 1820 / 1825 to 2020 / 2025,
o SOLD – Iron Condor – Sept2 @ 1955 / 1960 to 2070 / 2075,
o SOLD – Iron Condor – Sept2 @ 1970 / 1975 to 2070 / 2075,
o SOLD – Iron Condor – Sept2 @ 1980 / 1985 to 2080 / 2085,
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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