This Week in Barrons – 5-22-2016:
Ms. Yellen, even I was surprised by the ‘unintended consequences’ surrounding the market’s reaction to the minutes of your last FED meeting. By now I thought everyone knew that you trained your peeps to talk like hawks, and act like doves. You all believe that the direct costs of waiting to raise interest rates (inflation) along with the indirect costs (pension fund solvency [http://cnnmon.ie/1XFciMB] and people’s savings) are insignificant at best. Your GDP forecasts are wishful thinking. You continue to believe that your policy tools will move the economy quickly in your desired direction, and you are constantly surprised when they do not. Factually, monitoring the LIBOR rate does a better job of predicting future FED movements than listening to your rhetoric. And by the way, the LIBOR rate has barely budged since the release of your last FED minutes – suggesting that no rate hike is coming in June. Your FED believes that inflation was yesterday’s problem, and today’s FED problem is stagnant median incomes. Your FED believes that a ridiculously loose monetary policy and a hyper-inflated stock market will help solve that problem. Your FED is trying to act more like politicians (trying to manipulate markets with their words) than trying to do something about it with their actions. Your FED should really study Martin and Volcker, and learn from a more knowledgeable and effective group. History will remember your FED by their actions and ‘unintended consequences’, not by their newly acquired, political oratory skill set.
Secondly Ms. Yellen, I’m sure you realize by now that all of this ‘crap’ is set to hit the fan right about the time Obama (and presumably you) leave office – yes? As SF and I talked this week, at what point in our nation’s history did our elected and appointed officials adjust their time horizons to be: “Just make it right while it’s MY responsibility, because I really don’t care what happens on the next guy’s watch”? Where did the Golden Rule go? I assume you know:
- That health insurers in the state of Washington are throwing the ‘affordable’ portion of the Affordable Care Act right out the window by requesting a 13.5% premium increase next year, and offering fewer insurance choices.
- That the Empire State manufacturing report that was expected to show a growth reading of +6.5 came in at a recessionary MINUS 9.
- That 52% of the most recent lay-offs are in the oil sector, with 2nd place (another 21%) coming from the HIGH-TECH sector. So the good jobs continue to leave, while the ‘Do you want fries with that’ continue to grow.
- That the slump in retail has spread to the agricultural equipment industry – where sales are down 20% year over year (YOY), and to the big truck industry where the numbers are down 39% YOY.
- And that over 30% of today’s auto loans are ‘upside-down’ (meaning people owe more than the car is worth). This is due to auto dealers writing 6, 7 and often 8-year auto loans in order to keep the monthly payment down. With payments that low, it’s no surprise that people are upside-down after only being 3 years into an 8-year contract. But honestly, didn’t we see this movie before with the 2007 housing crisis? I guess we figured that we’d try it with J.Q. Public’s 2nd most expensive asset this time.
Lastly, I do NOT think you will ‘hike rates’ in June, but not for the reasons you think. Back in December 2015 the rate on the 10-year Government bond was 2.24%. You then raised rates by a quarter of a percentage point, and by February 2016 that same 10-year Government bond had actually dropped to 1.8%. So your rate increase went completely un-noticed – except for the ‘unintended consequence’ that was the stock market’s negative reaction. If we didn't have an election coming in November, I would hope that you would raise interest rates in a heartbeat. But I can’t imagine Hillary on stage debating The Donald without a strong stock market to back her up. Right now the market is barely hanging on, and despite a FED rate hike being a non-issue, the market could take a big hit on a rate increase. If I were you, I would wait to see a super-strong May Non-Farm Payroll Report, along with polling numbers showing a convincing Non-BrExit (the UK voting to stay in the EU) before I would make a decision to increase rates.
In the beginning, I thought that all of these data points surrounding your FED’s actions were just ‘unintended consequences’. Lately however, I’m growing to believe that you REALLY have it all figured out. You have realized that your economic time bomb will hit right around election time – when you will have one foot out the door. And now you’ve planned the ‘Audit the FED’ bill (that’s making it’s way through the Senate) – to hit just after your retirement party.
Over the last 6 months, we have seen the S&P index go from 2070 in December, to 1810 in February, to 2100 in April, and now 2052. I do NOT believe the school of thought that the market is building a strong foundation from which to launch a new bull market, but rather the one saying that it’s in Central Bank desperation mode – trying to avert a market crash. One reason for my belief is that for the longest stretch ever recorded (16 going on 17 weeks) the ‘smart money’ has been selling out of this market. Secondly, stock buy-backs are not having the same affect that they had in the recent past. Thirdly, business bankruptcies have soared to a rate not seen for over a decade. I’m not talking just about the oil frackers going bankrupt. In fact on Friday we learned that The Sports Authority (that had announced the closing of SOME stores) has instead decided to close and liquidate ALL of its stores. Combine all of that with X-FED heads telling us that the FED consciously inflated the stock market in order to increase the “wealth effect”, and if stocks would fall it "could trigger systemic risk" to our entire economy.
Do we keep trading sideways inside 1825 and 2130? Possibly – maybe even probably. But one day this will end. Will the economy recover to the point we breakout, or will some event cause us to breakdown? My guess is that we trade sideways until we can't, and then we fail. We crash and work off many years of QE. Right now it’s a struggle, but the FED has deep pockets. I would not be surprised if we add to Friday's bounce and go up early in the week. But remember anything you buy this week is a ‘trade’ not an ‘investment’. The idea of buying something 7 years into a fake recovery at 20 times earnings – sorry, that math just doesn’t work for me. But snagging a few stocks for a quick 10-15% return, and hopping out before the next wave of selling hits, makes perfect sense to me. Closing over 2060 on the S&P would be mildly bullish, and over 2066 would be even more bullish. Closing under 2040 would spell near term disaster. Watch the numbers.
The AG Play:
If you played AG with me back in the fall, you are sitting pretty. For every $10,000 you invested, you’re sitting $74,500 richer today. Many of you (that have written to me) have told me that this 650% uptake in 9 months – is the best trade you ever made in your entire life. Again I say - congratulations. So this week I’d like to give you a couple more places where I think we can prosper just like we did in AG. First off, AG was a really good mining company – with a good management team. Secondly, their stock was priced at 10% of it’s all-time high. And lastly, AG had long-term (January 2018) options in order to minimize risk.
NGD is the next stock that I would consider. It’s a good company, and it has weathered the downturn. The only problem is that the mining sector is red hot lately. Many miners are already up 200%, and taking on a new position could very well move into the red quickly if the sector experiences a pullback. However, these types of plays are all about the future. I continue to believe that we’re heading toward an economic ‘reset’. I think gold has a date with $3,800 and silver north of $70 as the Chinese are buying it, and every Central bank is storing it. If I’m right and a major event takes place in the next 19 months, the mining stocks will be the biggest winners.
If you bought 1,000 shares of NGD stock at $4.21 and it went to its $14 high – you would net about a $9k profit. However, if we executed a strategy like we did in AG, that profit would be closer to $25k. Currently, NGD is selling for $4.21. I am looking at the $4, January 2018 call option chain, and I’m seeing overhead resistance at the $5 level. Now, the ideal situation may be to let the stock get over that $5 resistance level before investing in it, but we have a LOT of time between now and January of 2018. The $4 options were adjusted down by 3% on Wednesday, and you can buy them for about $1.55 each. The $4’s are 21 cents in the money, and as NGD rises we should be able to buy twice as many $8’s with our $4 profits – similar to the AG trade. Because of the ‘red hot’ nature of the sector, I would buy half your normal size now, and the other half if we get a slight pullback in the next couple of months.
I like AUY (another miner) for the same reasons, and although I already have it from when it was $2.75, I am going to buy more next week. AUY was a $20 stock, 3 years ago. I think that it could get there again. You can buy the $5, January 2018 calls for $1.47 and once the stock gets to $10 – you roll the $5 calls into twice as many $10’s.
CDE is another miner that could rise to $50 – as it did a couple years ago. Unfortunately CDE options are a little expensive, so I would move to the $10 options and buy them for about $2. The mechanics would be the same: when CDE gets to $15 - sell the $10’s and get TWICE as many $15's. Then at $15, sell them, and buy TWICE as many $20's.
Finally, SSRI has partnered with a Canadian company called Golden Arrow (GARWF). The head of Golden Arrow has just found ‘potentially’ the biggest silver deposit on earth, and has partnered with both PAAS and SSRI. You can get the $10, January 2018 call options on SSRI for about $2.85 per option. SSRI (once a $40 stock) is currently trading for $9.67, and when SSRI gets to $15, I would trade those $10 options in for TWICE as many $15’s.
PAAS has access to the bulk of Golden Arrow's biggest find (1.1B ounces) in Argentina. PAAS options are a little expensive, but an investment in the $15’s could be rolled to the $20’s and correspondingly into the $25’s and $30’s.
Could this really work, OR maybe we just got lucky with AG. I think that over the next couple years we're going to see much higher gold and silver. If you like penny stocks – then just buy some shares in GARWF for $0.58 / share – and wait for a year. You should wake up on January 2018 with a smile on your face.
- SPY (S&P indicator) could rally this week due to the put/call ratio being close to 1. 90% of the time that there are this many ‘short positions’ in the market, a rally ensues that brings the ratio down closer to 0.85,
- Tesla (TSLA) could move higher into $232,
- Google (GOOGL) could move higher into $750,
- EOG could move higher into $84.33,
- Facebook (FB) has the highest ownership within all hedge funds, and is in the top 10 holdings of more hedge funds than any other stock. That normally indicates that they’re NOT going to be selling it any time soon so a long position in FB would not be a bad choice,
- Gold may need to consolidate here a little bit and I will begin to consolidate my mining holdings into: AG, NGD, PAAS, CDE, SSRI, FFMGF & GARWF.
- Long various mining stocks: AG, AUY, DRD, EGO, FFMGF, FSM, GFI, IAG, KGC, and PAAS,
- And Long an oil supplier: REN @ $0.56
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!
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .
Please write to Mr. Culbertson at: <email@example.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <>.
If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is the handle.
If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Remember the Blog: <http://>
Until next week – be safe.