RF's Financial News

RF's Financial News

Sunday, April 17, 2016

This Week in Barrons - 4-17-2016

This Week in Barrons – 4-17-2016:


Ms. Yellen:
You held closed-door meetings with President Obama this past week, and I’m betting that he told you that your ONLY job was to continue to keep this stock market up.  The ‘heck’ with doing the right thing (and beginning to normalize interest rates) your #1 job is to make sure that the stock market remains inflated because it’s the ONLY thing separating us from a crushing depression.

We both know that your Zero Interest Rate Policy (ZIRP) has stimulated corporate buy-backs, and that corporate buy-backs are the difference maker in keeping this market afloat.  We also know that J.Q. Public sees the stock market as a reflection of the economy, and as long as it’s flirting with ‘all time highs’ he feels good enough to take on more debt.  And the world runs on debt and credit.  Every day banksters create ‘derivatives’ that they sell to other investors.  These ‘Asset-Backed Securities’ (ABS) are bonds or notes backed by financial assets – typically consisting of receivables, auto loans, housing contracts and home-equity loans.  As you can imagine, if the individual assets inside these bundled securities start to go south, then the assets themselves begin to implode.  Think of it exactly like the mortgage debacle of ‘05 – ‘08.

Now if we both can agree that the real impetus behind the stock market's rise over the past few years has been corporate buy-backs ($430B in 2014 and $540B in 2015), then you need to concentrate on the CREDIT market and not on the stock market.  Why?  Because corporations are BORROWING the money to do the stock buy-backs from the credit market.  For example:
-       The XYZ company (with a $15 stock price) decides to borrow money from the credit markets at 6.5% - in order to buy-back their own stock.
-       To borrow the money they use their sales ‘receivables’ as collateral.
-       XYZ starts buying back their own stock, meanwhile the world begins to take notice.
-       The world participates in the stock price increase, and drives the price to $30.
-       Unfortunately, each quarter XYZ’s sales are falling, and they lay-off more and more workers just to make ends meet.  That is to say, their business is dying yet the stock price is rising.

Now Ms. Yellen, it’s NOT the stock price increase that bothers me.  What worries me is a company’s CASH ability to pay back the 6.5% INTEREST that they owe on the borrowed money – used to drive their stock price higher.  See by using the monies to drive their stock price higher, they did NOT invest in R&D or in becoming more efficient.

But wait - it gets better.  What about the investor that loaned XYZ the money?  What happens to the Bank, Pension fund, Insurance fund, and/or Hedge fund when XYZ defaults on paying their 6.5% interest payment?  Honestly, they’re going to take a big hit to their asset ledger and their credit market capabilities could be downgraded.  This downgrade is solely due to XYZ’s inability to pay what they owe on the borrowed money.

So the reason to worry about a corporation’s declining revenues (sales) is not how the stock price will suffer (and it may), but rather how a corporation can re-pay their interest on their debt obligations given reduced revenues.  A major corporate default could trigger an immediate debt downgrade, and then we would be looking at 2008 all over again.

So I believe that you can NOT get a ‘leg up’ on interest rates because an increase in interest rates (coupled with falling sales and earnings) would trigger a series of corporate interest payment defaults – from which the world could not recover.  Therefore, if stocks can't hold a particular price, then some tangible amount of corporate debt will become non-performing.  If enough of it does, we have contagion, and a repeat of 2008.

The Market:

As SF so aptly pointed out, notice the spike in business closures in February of 2016. 

Align the above graphic – with a business’ needs for growth capital – with all of the financial lay-offs occurring around the globe – and you’ll begin to get the picture of a global downturn.

-       Alcoa kicked off earnings season this week by announcing a sales decline, profits that were down 90% (year-over-year), and 1,000 new employee layoffs with another 1,000 in the 
-       Consumer confidence fell this week to sub 90 – a number not seen in years.
-       Production capacity fell to 74.8%.
-       Wells Fargo was fined $1.2B for selling toxic mortgages to investors.
-       Goldman Sachs was fined $5B for similar mortgage shenanigans. 
-       Reuters confirmed that Deutsche Bank has agreed to settle U.S. litigation over allegations it illegally conspired with Bank of Nova Scotia and HSBC Holdings Plc to fix silver prices at the expense of investors.  They also say they are going to disclose info on other big players that were a part of this same scheme. 
-       In total, our banksters have now paid over $200B in FINES for rigging markets, shafting investors, fixing rates, and laundering money.

If you've been watching gold and silver you're seeing something we haven't seen in a long time.  After a blistering run higher in gold, silver and the miners, they did NOT roll back down.  They traded sideways a bit, caught their breath and have started moving higher again.  This is definitely different.  In the last 5 years, they would pop higher, but then instantly roll right back down.  I’m in a fair number of them, and have hesitated talking too much about them because (for years) it was so easy to get burned by buying false breakouts.  However it looks like the tide has turned.  Just about all of the miners have once again started higher.  Please feel free to check out some charts on: NG, HL, KGC, SAND, AG, FSM, and DRD.

There is still an EPIC battle going on in the stock market.  On one side you have: horrible sales, lower earnings, less shipping, a slowing China, lousy durable goods orders, and stagnant wages.  On the other side you have the incessant desire to keep asset values up in order to keep trillions of dollars in derivative debt from imploding.  Thus far, the various FED’s have kept things going.  Can they keep all of these plates spinning long enough to come up with a plan B, which will be some form of monetary reset?

Let’s look at the big picture.  On February 11th of 2016, the market was at 1820 on the S&P, and today we’re at 2080.  On October 15th of 2014 (a year and a half ago), the low of the day was 1820.  So we could fall all the way back to 1820 (a 12% decline) and not break the lower range the market has been in for 2 years.  With the market at 2080, we're still inside a major box between the high of 2135 and a low of 1820.

My guess is that this upcoming week will be a bit red.  Yes it is earnings season and stocks will pop and drop like crazy over individual releases, but it is my thinking that we do a bit of fading.  I am writing this AHEAD of the oil gathering at Doha, so things could change quickly.  If you're not familiar, there's a big meeting of oil producing countries in Doha today – to see if they can agree on a production cap.  If this meeting is viewed as a success, oil will spike and so will the markets on Monday.  If it is a yawner, then I think that the market is going to do some backtracking.

As hard as it is to believe, until we get over 2135 or below 1820 we’re just in a large range of up and down chop.  Not a bull market or a bear market – just a TRAPPED market.  Try and buy the dips, and sell the rips.  It's a lot of work, but the overall market has been running in place for 18 months.  There's no solid trend, so you have to trade what they give you. 


I am:
-       Long various mining stocks: AG, AUY, DRD, EGO, FSM, GFI, IAG, KGC, and FFMGF,
-       Long an oil supplier: REN @ $0.56,
-       Long BA – Apr4 / May – Diagonal -133 / + 135 Call  
-       Long GLD – May – Call Debit Spread – 118 / 123,
-       Sold LEN – May – Call Credit Spread – 48 / 50,
-       Sold NDX – May – Iron Condor – 4125 / 4150 to 4750 / 4775,
-       Sold RGR – May – Put Credit Spread – 55 / 60,
-       Long RUT – May – Butterfly – 1000 / 1080 / 1130,
-       Long POT – Stock & May – Put 16,
-       Long TLT – May & June – Call Debit Spreads – 128 / 133,
-       Sold TSLA – Apr – Iron Condor – 227.5 / 232.5 to 275 / 280,
-       Long WYNN – Apr4 – Butterfly – 99 / 102 / 105 Call.

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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