This Week in Barrons – 1-15-2017:
"Hey – what do I know?" … Stevie Lee Woods
- Bank of America declared earnings on Friday, and it showed that their profits resulted from cost cutting versus increased revenue. So, what do you do when your company’s not doing well? You increase your stock buyback program – to drive your own stock price higher.
- December’s retail sales came in with a meager increase of 0.2%. And if you deduct the price increases for gasoline, coffee, insurance, education, healthcare, and other elements – the number of ‘things purchased’ actually declined.
- With smartphone sales slowing, SF pointed me toward Peter Thiel declaring the ‘Age of Apple’ being over. With Apple’s dependence upon the iPhone, Apple’s stock could be ‘dead money’ until their next big idea. And that needs to be larger than watches and earbuds. If Apple cornered the entire earbud market, they would only gain $10B in new revenue ($2B in profit) – a drop in the bucket to a $633B company. The smartphone market slowing is a big deal to Apple, and their investors.
- With the price of oil moving higher, I would have expected that global oil inventories would be shrinking. Instead, December’s crude oil inventories showed a doubling, and corresponding increases in gasoline and distillates as well. It seems that the only shortage we’re seeing is on the space required to store all of the oil.
But, “Hey – what do I know?”
I’m a believer in the physical metals. I would also love to believe in Bitcoin because: (a) it’s an alternative to the Dollar, Yuan, Lira, Ruble, etc., (b) it's fairly anonymous to buy, and (c) it's a way around the increased tracking and digitization of our personal spending patterns. Yet for all of those attributes, Bitcoin has been hacked, exchanges closed, and if the Internet were shut down – it would be next to impossible to use Bitcoin. Therefore, I’m back to the physical metals, and still believe that they are destined for higher prices.
On a side note, several years ago the IRS brought a lawsuit against an employer who was paying his employees with $50 U.S. minted gold coins. The employer would pay the employee in gold coins (taking the current exchange rate into account), but would only declare the face value of the gold coin on the payroll stub and income tax report. The IRS said that this was simply an elaborate scheme to avoid paying taxes. And that just because a U.S. minted coin is stamped: “$50”, “In God We Trust”, and “Legal Tender” – doesn’t mean that the coin is only worth $50. During the trial, none of the expert witnesses could put forth a more viable value for the coins other than the $50 printed on them, and the trial ended with 0 indictments out of the 160 counts brought by the government. Remember in 1925, that $50 gold coin was actually worht $50, and not the $1,200 that it is worth today. I cringe every time Deutsche Bank admits to rigging and manipulating the precious metals market, and agrees to pay another $100 million fine. As Bitcoin hit $1,000 last week, I thought that if we could just remove the Central Banksters from the manipulation business – we should be able to get Silver over $1000/oz. and Gold over $10,000/oz. But, “Hey – what do I know?”
Finally, this week the Doomsday Clock moved to just 3 minutes to midnight. The Doomsday Clock is a subjective measurement of how close the world is to nuclear war. It is updated periodically as scientists from around the world assess the threats that could lead a nation to use a nuclear device. At 3 minutes to midnight, the clock is now the closest is has been to Doomsday since 1953. At 3 minutes to midnight, the clock is even closer than it was during the Cuban Missile Crisis in 1962, when it was between 7 and 12 minutes. But, “Hey – what do they know?”
“Forecasts usually tell us more about the forecaster than the future.”… Warren Buffet
According to Goldman Sachs, the top 3 major risks to a Trump presidency are:
- Risk #1 is Protectionism. If Trump stays true to his border tax agenda, the ripple would have a downward effect on the global economy.
- Risk #2 is European politics. Europe’s labor problems continue with the unemployment rate hitting almost 20% in Spain, and almost 12% in Italy. There will soon be elections in France and Germany, and the BrExit negotiations are on the horizon.
- Risk #3 is China’s increasing debt appetite. China’s rising Debt-to-GDP ratio and declining cash inflows are globally concerning – see below.
The timetable for many of Trump’s presidential reforms is as follows:
1. (Mid-January) 2017 Budget and Foundation for Obamacare Repeal
2. (January-February) Approval of Trump Cabinet Nominations
3. (January-February) Regulatory Reforms
4. (February) Supreme Court Nominee
5. (February) Tax Reform Process Begins
6. (February) Actual Obamacare Repeal Vote
7. (February) Trump Budget
8. (February) Trump State of the Union Address
9. (February-March) Dodd-Frank Repeal Bill Moves Forward
10. (Mid-March) U.S. Debt Ceiling will be Hit
11. (Early-April) New Budget Resolution and Tax Reform
12. (April) Trade Battles
13. (Late-April) Potential Government Shutdown?
Investors are overly optimistic on how low Trump can actually cut taxes. The debate over the federal deficit is going to kick off in March, and Congress will begin to push back on Trump’s proposals – as they would cause a significant increase in the size of the deficit. According to Goldman Sachs: Trump has proposed to cut the corporate tax rate from the current 35% to around 15%. While that is seen as a slight boost to corporate earnings, the federal deficit would balloon by 60% to $1T in 2017. It’s the increased deficit that could be the focus of a government shutdown in late April. Goldman believes that the S&P will peak at 2,400 in March, and will end 2017 around 2,300.
The S&P began the week at 2,273, and ended it at 2,274. For the past month, the DOW and S&P have traded sideways – not willing to breakdown or breakout. And with earnings season starting, these next several weeks will be filled with chop. The establishment is pushing back against Trump, and I can't see them rewarding him with higher markets for much longer. For the next several weeks, I'm going to play the markets with ETF's such as: DIA, SPY, SPX, IWM, RUT, QQQ, NDX and some of their inverses such as DOG and SH. If a trend develops, I may dabble in TWM, SDOW and SPXU. Until I see a trend in either direction, I’ll take what the market’s indices give me within their ranges.
Lastly, our FED has raised interest rates 2 times in the past 10 years. What happens to the economy if the FED gets aggressive and tosses 3 or 4 rate increases at President Trump? Aggressive rate increases within short time periods would derail virtually anything Trump would be trying to accomplish. And what if our FED also stopped buying stocks? And what if our FED had their other Central Banksters begin to SELL our market? It’s just something to consider. Take care and stock up on popcorn, this show is just getting started.
Last week a reader asked me how I trade the indexes for income on a weekly basis? My basic income strategy is to: (a) Sell PUTS (Put Credit Spreads) on down-moves in Bullish markets, and to (b) Sell CALLS (Call Credit Spreads) on up-moves in Bearish markets. In markets with low volatility (such as this one), the premiums paid for selling regularly positioned options (such as delta 10s and delta 14s) are just too low, causing the risk reward not to make sense. That is to say, one small mistake in any one trade – will cost you all of the profits from the previous 8 good ones. Therefore, in this environment, I sell Iron Condors with their inner strike ‘closer to the money’. I sell the inner strike in the low delta-30s and the outer strike in the upper delta-20s. That gives me as close to a 1:1 risk to reward relationship as possible. Then if one side of the trade goes bad:
- (a) you have enough money on the other side of the trade to either roll it, or
- (b) buy it back and still remain even to profitable.
Depending upon market trend, I take corrective action as soon as one of the inner strikes moves into the money and exceeds a delta of 50.
I only use this strategy on the major indices (SPX, NDX, RUT, DIA, SPY, QQQ, and IWM) due to liquidity, and during earnings season they tend to be slightly less volatile. An example of such a trade would be last Thursday:
- I sold the SPX, January 20th, 2260 / 2265 to 2290 / 2295 Iron Condors for between $2.30 and $2.45.
- As of Friday, the SPX ended the day @ 2275, and is estimated to move less than 21 points in either direction prior to Friday the 20th.
In next week’s newsletter, I will highlight any modifications I do to this trade in order to better show you how to create income streams using this same technique.
For this coming week, I’m watching:
- NFLX (NetFlix) = With it being at all-time-highs, and with earnings on Wednesday, you may see it pop higher on Tuesday.
- TSLA (Tesla) = It’s moving higher on the back side of a short squeeze.
- NASDAQ = A weekly squeeze just fired long; therefore, watch for continued upside on the NDX and QQQs.
- RIG = I’m looking for a move from 15.5 up into resistance @ 17 this week.
- AZO (AutoZone) = I’m hoping for a drop into $722.23 or even $754.82 so that I can buy it – with a target up into $807.55.
- MSFT (Microsoft) = It looks to be poised to turn higher this coming week.
- GLD (Gold) = When we touched $1,120 we started moving to the upside. I’m currently looking for a $1,206 target and then an extension to $1,255.
- The U.S. Dollar (currently @ $101.18) is in the process of pulling back to the mean @ $99.70 (chart on the left) – but on a monthly chart (on the right) it remains bullish.
With traders hating uncertainty, I think the looming inauguration will keep any rally in check this week.
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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Until next week – be safe.