This Week in Barrons – 5-22-2016:
Unintended Consequences…
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.
The Market:
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.
TIPS:
-
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.
I am:
-
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!
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