This Week in Barrons – 8-7-2016:
$200 Billion a Month…
$200 Billion A Month is the amount of QE being delivered by Central Banks around the world. So if you are a corporation with stocks or bonds to sell – my advice would be ‘sell early and sell often’ because every 5 months, $1 Trillion comes ‘out of no where’ and into the world’s capital markets. Some of it is being used to buy Government bonds and Sovereign short-term notes, but after those purchases showed little impact – the Central Banks started buying corporate debt.
Corporate debt is formed when a company needs cash, and sells its own bonds above normal market rates. For example, if Uncle Sam is offering to pay you 0.5% per year interest on a $100k investment, a company like Apple could offer to pay you 5% per year to buy $100k worth of its company’s debt. If the company is a well-run company like Apple, J.Q. Public will be paid back. However, if the company is not as well run as Apple – and decides that after selling a few million in debt notes to fold, then J.Q. Public will be lucky to get a few cents on the dollar back on his investment.
The problem with Governments using taxpayer money to buy corporate bonds is their lack of analysis and due diligence. Governments simply have a number of bonds that they are prepared to buy each month, and they end up giving money to badly run companies along with well run ones. Also, when Central Banks are buying with reckless abandon, company executives start using that money for ‘non-growth’ investments such as: stock buybacks – which push their own stock price higher even in the face of declining earnings to sweeten the paycheck for the corporate executives.
For years now I’ve been telling you about how various Central Banks have been buying U.S. stocks. The Swiss National Bank is the worst offender, and currently holds $63B in U.S. stocks. Here’s a link showing you each and every stock they hold and the corresponding quantity. For example they own: 15m shares of Apple, 21m shares of Microsoft, 26m shares of GE, etc.
There is NO true price discovery when a government can print money – and use that ‘fake’ money to buy ‘real’ stocks. What is the real value of a stock if you have a buyer with endless pockets that doesn’t care about how much they are paying or earning on the stock? Even CNBC’s’ Jim Cramer gets it. The other day (on camera) he was wondering how the markets could be so strong with low volumes, saggy earnings and big investors moving money out of the markets? Then he said: “It’s Japan! The Government Investment Pension Fund of Japan has taken enormous stakes in individual U.S. companies. The list includes $2B worth of General Electric stock, $1.5B in Alphabet/Google, $100m in Whirlpool, $180m in Eaton, and $150m in Roper Technologies. Now, if you do these aggressively, under low volume, you actually move these stocks." Cramer went on to say: “It seemed odd to me that some of these stocks have stayed afloat despite reporting so-so earnings. This is concentrated buying by the government. Unlike the Federal Reserve, which opted to buy Treasury bonds, Japan has bought stocks -- individually and broadly -- as well as bonds and real estate. I’m astounded to learn of this tactic. This fund has to have been one of the biggest, if not the biggest, buyer of GE stock last month,” he said.
This is why this market is still flirting with all time highs while the economy is in the toilet.
- $200B a MONTH in QE,
- The Swiss National Bank buying $63B in US stocks, and
- The Japanese buying umpteen billions in U.S. stocks, despite
- A GDP reading of 1.2%,
- 650 interest rate CUTS since 2008 (one rate cut every 3 trading days),
- And total earnings being lower for 4 straight quarters.
How far can this madness can go before it ends – is a mystery. How bad will things get when it blows up – is another mystery. Remember, institutions like Central Banks and the Swiss National Bank have ‘no skin in the game’. They PRINT money like it’s monopoly money. The Swiss National Bank could lose 90% of its $63B investment and still sleep like a baby – because in the morning they would just print and buy more.
We are in uncharted waters. Normally in this situation, experienced sailors slow to idle speed. They check depth indicators and scan the water for surface patterns that might suggest rocks. The same thing should be true in this market. I’d want to be more than just casually cautious about buying something here, because who knows what lurks beneath the surface? Who knows what stops this madness? Tread lightly and stay aware because you’re living through a historic time.
On Friday, the Non-Farm Payrolls Report showed that the U.S. added 255k jobs in the month of July. But what wasn’t said was:
- It was the largest ‘seasonal adjustment’ in 10 years that accounted for 170k of those jobs,
- Another significantly large ‘birth/death model’ accounted for another 112k of those jobs,
- So if I subtract off the government ‘fudged’ numbers (‘seasonal adjustments’ and the ‘birth/death model’) – we actually LOST 27k jobs last month.
Loosing 27k jobs last month brings us in line with:
- Challenger Grey coming out and telling us that there was a 19% increase in layoffs to 45K last month, and
- The Government showing a 1% reduction in actual withholding taxes paid in the last month, along with last month’s 12% reduction in corporate taxes paid.
The market is all about ‘recession avoidance’. Just like the Democratic National Convention was rigged against Bernie, the stock market is rigged to be buoyant despite any of its economic ills. So do we simply move higher every day into November? As silly as it sounds – that COULD happen. We’ve moved considerably higher on the heels of: QE, zero and negative rates, the buying of stocks by Central banks and of course the fudging of the economic data. While it’s fun while it lasts, the question is: How long will it last? After all, trees don't grow to the moon, and markets will not rise forever. This could splinter in many different ways:
- The Eurozone could disintegrate back into 28 separate nations and currencies – which would take down the European Central Bank.
- War could be declared between NATO and Russia – and we step in.
- The U.S. could get drawn into the conflict in the South China Sea over Man-Made Islands.
- The velocity of money could suddenly increase, and almost overnight we could go from 8% inflation to 20 or 30% inflation.
- China could suddenly say that they have 30K tons of gold, and crash the world’s treasury markets by selling off all of their foreign treasuries.
- Or maybe Italy pulls out of the EU (which is ‘no big deal’), but as a result their oldest bank collapses. The Italian bank collapsing would pull the pin on the derivative grenade at Deutsche Bank (DB). This would cause DB to implode and take out half the Bank of Japan. The Bank of Japan would be forced to sell all of their U.S. holdings, which would trigger a sharp U.S. market crash – and so it goes.
One thing is certain, if printing fake money forever was the way to true success, it would have worked any one of the times that it has been tried. Am I to now believe that because ALL nations are trying it, it's going to work? Sorry I don't think so. The Reset is coming.
I think the reason Gold is moving higher is because everyone is beginning to see that years of QE haven't solved the economic issues. FED policy has failed. And the EU and BOJ spending umpteen billions each month only cause their economies to sag more. Everyone is noticing China (one of the few nations that is actually growing) buying every last ounce of gold they can get.
My only suggestion on whether to invest in this market is this: If you do so – ONLY do it as a ‘trade’, NOT as an ‘investment’. In terms of ‘trading’, I would lean into this market and take what you can get. But for any long-term investments like 401k’s and IRAs – I can’t recommend taking that much risk. My worry on the 401k and IRA side of things, is to make sure that when this ‘gravy train’ starts to crumble – you can get out quickly.
Enjoy this run, but understand it for what it is – a manufactured run to make everyone believe that all is well with our economy. My biggest fear is that this doesn’t end with a gradual ‘sideways to down’ cycle, but rather with a: ‘limit down’ one day, ‘limit down’ the next, everyone trying to get out, and circuits blowing up. Be careful.
Thanks to SF for questioning what would happen if the U.S. Government took a similar position on banking & insurance as South Korea took against Volkswagen’s emissions discrepancies. “Volkswagen (due to their complete disregard for our emissions legislation) is stripped of its right to sell 80 car models in this country. A Volkswagen executive (stationed in South Korea) has been indicted on charges of falsifying 140 documents. Prosecutors have indicated that they will be seeking similar criminal charges against other Volkswagen executives.”
From your e-mails it’s clear that many people are jumping on the gold & silver miner investment bandwagon. Here are three small miners that you potentially haven’t heard of:
- Mirasol (MRZLF) is a company that finds good projects, and then partners with larger mining companies to carry them through to production. Mirasol has an ‘A-List’ management team, and is working in ‘elephant country’ down in Chile and Argentina. ‘Elephant country’ is where you find big, undiscovered reserves. Mirasol has a market cap of $103.7 million and 44.7 million shares outstanding.
- East Africa Metals (EFRMF) is looking for gold in Ethiopia, and finding it. They expect to have a mine in production next year. They are a small company with a market cap of $25.7m and 113 million shares outstanding.
- Telson Resources (SOHFF) is also a small market cap company ($22.2m) and 92.9m shares outstanding. It just secured a $10m line of credit and is advancing its Mexican Tahuehueto silver-gold project. They should have revised projections out shortly, and I’ll keep you posted.
My attraction to the metals continues. Some relatively inexpensive ones are: FFMGF, NAK, BAA, AUMN, EGO, and FSM. I’m keeping it simple by being:
- Long Calls in GOOGL, and
- Long various mining stocks and their respective call options: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.
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.