This Week in Barrons – 4-24-2016:
“NO - not show YOU the money. Show ME the money.” …Jerry McGuire (movie)
Demographics In View
Over $51B has been pulled out of mutual funds thus far in 2016, and Lipper says that an additional $3B more was removed last week. In addition, Hedge funds have lost over $15B this quarter. A lot of this is being blamed on the market’s volatility, negative interest rates, and horrid economic numbers. I think that there’s a lot of truth to that. But a different angle on ‘Show ME the Money’ is in play.
This is the year when the first wave of ‘Baby Boomers’ will turn 70 years old. For the next 20 years, approximately 3 million people (per year) will turn that magic number. These ‘Boomers’ grew up during the most productive times in history. They had the good jobs. They made the most money, and most have 401k's. ‘So what?’ you ask.
Well, there's a law that requires: IF you have a 401k and IF you are 70.5 years old – you MUST start taking your money out of your 401k. So using conservative numbers:
- 3 million folks turning 70 this year, and (being conservative) 50% have a 401k. They (to date) have resisted taking their money out because the market just kept going up, but NOW they have no choice – it’s the law.
- That also means that 1.5m are no longer putting money into their 401k’s (given they’re being forced to liquidate them). That doesn’t sound too terrible until you realize that next year we will add another 1.5m to that withdrawal list, and the year after that, and the year after that. All the while additionally adding to the non-depository list.
Economists will tell you that these new 70-somethings will begin to buy things like never before – because they are ‘flush with cash’. I, on the other hand, believe that these new 70-somethings will continue to keep their expenses low so that they don’t out-live their money.
This naturally adds more sellers than buyers to our stock market. Unfortunately, for stocks to move up – you need more buyers than sellers. Lately, corporations have been doing the buying via borrowing money or selling their own bonds, and then using the proceeds of the sale to buy back their own stock. With more and more 70-somethings liquidating their 401k’s, either our government comes up with more ways to prop up stocks, or stocks have no choice but to go down. And if stocks go down too far, companies won't be able to pay the coupon on the bonds that they sold to re-purchase their stock. Imagine the train wreck (crash) if 35% of corporate America was to default on their own corporate bonds?
My point is that over the next several years, our FED is going to have to get incredibly clever with their shenanigans to stave off the wave of Baby Boomers – hitting 70.5 years of age and liquidating their 401k’s. Desperate times often lead to desperate measures, and maybe negative interest rates in the U.S. is one of those measures. We know that our current debts can’t be paid, and debts that can’t be paid – won’t be paid. With trillions in debt, there’s going to be a reset and the retiring Baby Boomers are just another reason why.
We've just come through a week of horrible earnings. Microsoft (MSFT) missed, Google (GOOG) missed, Intel (INTC) guided lower and slashed 12K jobs, Caterpillar (CAT) had sales down 13% and was just a disaster. I think this coming week will look something like last week – a lot of chop, but in the end not a lot of directional travel. But at least we have some levels we can use as a barometer for further gains or losses. The high on the S&P this past week was 2111, and the low was 2081. So, in general terms, buying when the market is over 2111 makes sense, and sitting tight or going short under 2081 works for me.
Factually (speaking of manipulation):
- Eric Hunsader CEO Nanex LLC reported that if you would have bought and sold the index futures between 2am and 3:00am (buying at 2:00am and selling at 3:00am) – from 2005 until 2016, you would have captured half of the market’s total gains and NONE of the losses. Unbelievable!
- This week one of the nation’s largest pension funds has applied for permission to cut benefits to its 250,000 members by approximately 50%. The fund has missed its benchmark for performance for years, and now 250k people face the reality that their $3k a month check may only be $1,600/month going forward. FYI: If they don't get permission to cut the benefits, the pension fund will be insolvent by 2025.
- About 33% of Q1’s S&P earnings will be non-GAAP (false) add-backs – accounting for 680 false-positive S&P points.
- Last week Wells Fargo confessed and was fined $1.2B for mortgage fraud. This week the FED elevated them to elite / ‘primary dealer’ status.
- This week, when Draghi was speaking about the ECB’s plans – the ECB itself was selling $2B of ‘naked’ gold futures in order to keep the price of gold down. This was an illegal sale done blatantly by the ECG. I happen to agree that the miners needed a bit of a correction as they've soared like eagles lately, but it’s a blatant (in your face) manipulation.
Simply put, we are continuing: (a) with 0% interest rates, (b) to overload our FED’s balance sheet, (c) to print $85B Euro's a month and have NEGATIVE interest rates in Europe, (d) to flounder in Japan, and (e) to chatter at the upper echelons about ‘helicopter money’ – simply depositing $2.5k to $5k cash in every bank account around the world.
Now you have to ask yourself: Why (after 7 years into a recovery) are we still doing economic accommodations at full blast? Why are the Banksters talking about ‘helicopter money’ with the markets at all time highs? Why does half-the-world have negative interest rates? On one side there are hundreds of reasons why stocks should be moving lower. On the other side, there is a manic Central Banking system that is hell bent on ‘Doing what ever it takes’ to keep markets moving higher. Who wins this battle? I'm siding with reality. If all it took to keep markets inflated was for The Wizard of Oz to print money – don’t you think we would have done that by now? Even our Banksters know that the printing press is nothing new.
Congratulations to all of you that followed me on the ‘Vegas Play’. The strategy turned $20k into $94k within the past 6 months. I’ve received a lot of mail over the past week surrounding this, and allow me to recap and address our next moves. To recap: 6 months ago I recommended investing in a silver / gold miner: First Majestic Silver Corp. (AG) – using an ‘At the Money’ options strategy that went like this:
- AG stock (at the time) was selling for $3.12 per share, and had traded as high as $30 in the past.
- The $2 AG, January 2018 Call Option was selling for $1.95.
- Step #1 = Buy 100 - $2, January 2018 Call Options.
- Step #2 = When AG’s stock gets to $5 – sell the $2 Call Options and buy an equal amount of $5, January 2018 Call Options.
- Step #3 = When AG’s stock gets to $10 – sell the $5 Call Options and buy an equal amount of $10, January 2018 Call Options.
- Step #4 = When AG’s stock gets to $15 – sell the $10 Call Options and buy an equal amount of $15, January 2018 Call Options.
- If these steps worked according to plan, you would successfully have turned about $20k into $500k in 18 to 24 months if AG’s stock went to $20, or $1.1M if AG’s stock went to $25.
This was the same ‘At the Money’ options strategy that was used on the miners several years ago, and I felt (6 months ago) that the miners were ready for a move higher.
The Good News is that AG’s stock touched over $10 per share this week – and ended the day (on Friday) at $8.90. If you did the deal, you have successfully turned $20k into $94k in 6 months. The bad news is that because AG’s stock has risen so quickly – we didn’t get the ‘Call Option’ premium decay that I had anticipated – and therefore did NOT make as much money as I had planned.
But this play (in anyone’s book) has already been a big winner. Any time you turn $20k into $94k in 6 months – you have hit a home run. There are NO guarantees that it will continue to work. If you’re nervous about the trade, then close it out for a huge profit, sell half, or skim some profits off the top and continue. As for me, I’m continuing with the plan – with a couple small modifications. When AG’s stock touched $10, the option makers adjusted the price of the $10 options higher than normal. So I’m going to split my next buy purchasing 50% - $10 options, 35% - $12 options, and 15% - $15 options.
If you’ve been reading my column for any length of time, you know that I feel that there’s a grand reset in the works, and Gold is going to be used as a backing for certain currencies with silver tagging along for the ride. I have said for years that silver will be $75 to $100 per ounce – and it almost made it there in 2011. I think that silver is destined for higher prices – so taking some $12 and $15 options / 20 months out is a risk that I’m willing to take. You can play it safer by taking what you can get of the $10 options, and even buying some $7 ‘In The Money’ options is fine too. The play is already a massive winner.
Can you get into the play now? I say YES. If things continue to go as ‘sort of’ planned, then this $94k will turn into $700k. You can certainly start by buying some $7 January 2018 Call Options on AG. We know that this same style of trade worked in 2010 and 2011. But yes you, can start the play today – even though it is a little more risky.
- Long various mining stocks: AG, AUY, DRD, EGO, FFMGF, FSM, GFI, IAG, KGC, and PAAS,
- Long an oil supplier: REN @ $0.56,
- 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 TLT – May – Call Debit Spread – 128 / 133,
- Sold TSLA – Apr5 – Iron Condor – 240 / 265.
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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