RF's Financial News

RF's Financial News

Sunday, June 4, 2017

This Week in Barrons - 6-4-2017

This Week in Barrons – 6-4-2017:

Does ‘covfefe’ mean: Why do the markets only go up?

   I’ve grown comfortable with the fact that the upward movement in the markets is due to the Central Banksters.  For example:
-       Every month (under the auspice of QE) Mario Draghi prints 80B Euro's, jams them into the economy, and a significant portion of those find their way into U.S. stocks.  
-       The Bank of Japan now owns 50% of their own stock market.
-       The Swiss admit to owning at least $100B in U.S. stocks.
-       The ECB owns 10% of all European Corporate debt.
-       And it’s anyone’s guess the portfolio that the FED’s Plunge Patrol Team has accumulated.

   The other answer to the question: “Why are the markets higher than they should be?” resides in the fact that most people are investing in ETFs, and ETFs inherently distort stock market valuations.  An ETF (Exchange Traded Fund) is a marketable security that tracks an index, a commodity, a bond, or a basket of assets like an index fund.  It owns ALL of the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides the ownership of those assets into shares.  By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin, and purchase as little as one share.  Another advantage is that the expense ratio for most ETFs is lower than the average mutual fund.  So, when buying and selling ETFs you only have to pay the broker’s commission.  So what’s the problem?
    The problem is that the ETF owns ALL of the underlying assets.  As additional investors pile into the ETF, the ETF goes out and buys whatever is inside of that particular ETF – irrespective of whether all of those companies should be bought.  For example, if someone buys the SPY (which is the ETF that covers the S&P 500), the ETF is required to buy each stock within the S&P 500.  Here’s the hitch: say you are the XYZ company – a member of the S&P 500 and you’re doing great.  You are profitable, paying dividends, servicing customers, and hiring more and more employees.  But say you’re the ABC company, barely hanging on, laying off most of your staff, not making money, and nobody wants to invest in you.  Guess what?  The SPY ETF is required to buy shares in ABC just as it does in the popular XYZ company.  The ETF does not discriminate based upon P/E ratio, profitability, or anything.  When the SPY ETF gets money, it divides it up into the 500 stocks that comprise the S&P 500, and simply buys them.  This has created HUGE distortions, and is causing the ABC company to go up – only because the ETF is buying their shares.  This results in the ABC company being enormously overvalued.
   Another example of this is the Russell 2000 Index.  It is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.  While the S&P 500 index is primarily used for large-cap stocks, the Russell 2000 is the most common benchmark for small-cap stocks.  According to the Wall Street Journal, the Price to Earnings (P/E) ratio of the Russell 2000 is 81.  http://www.wsj.com/mdc/public/page/2_3021-peyield.html ]  In fact, Paul Lyons of Tectonics found that almost 31% of all Russell 2000 small-cap stocks – have had NO EARNINGS for the previous 12 months.
   So, we have the Central Banksters buying stocks.  They have no risk because printing money and buying stocks costs them nothing, and it pushes the overall market higher.  As bad as that is, add to it the ETFs buying every stock in a particular index – whether or not they are worthy of purchase.  With both of these issues working in concert alongside zero interest rates, corporate buy-backs and ‘adjusted’ earnings – this market is distorted to proportions that are truly unknown.  Factually, historic price-to-earnings (P/E) ratios are around 16.  We now have the Russell at an average P/E of 81, the S&P at a P/E of 24, and the NASDAQ at an average P/E of 27.  The talking heads say that we will grow into those numbers.  Unfortunately, the only people that know when and how this market mania ends are the Central Banksters, and now they’re using words like ‘covfefe’ to explain their actions.

The Market:

   I, like John Candy above, am in total amazement of this market.  I do think we've entered into the final throws of this insanity – such as it was in late 1999.  But in 1999, the market was still grounded in earnings.  Then, you were able to choose the companies that had a $200 share price, a desk, a phone, and a business plan that had the word ‘Internet’ on it.  It was just a matter of time before The Street said: "Okay, we've listened to these earnings promises year after year – and there’s nothing there.  Tell me why I’m spending $200 a share on a stock where the company hasn't turned a profit in 9 quarters?  Forget it – I’m out."  A few weeks into 2000, investors started pushing back on the lack of earnings, and I figured that the next earnings season might be the end of things – and it was.  But today everyone is a beneficiary, and it’s the ultimate game of musical chairs.
   On Friday, we had the release of the Non-Farm Payroll Report (NFP) – and it stunk up the joint.  Economists’ estimates for the Friday report were for 185K new jobs being created in May.  When the government’s number of 138k crossed the tape – you could feel the air leaving the balloon.  Even Steve Leisman on CNBC said: “This is the 4th consecutive decline in monthly payroll data – does this mean our economy is not as strong as they’re telling us it is?"  It gets worse:
-       1. The government revised March and April down by 66K jobs.  Evidently, those jobs just didn't really exist when they released the reports.
-       2.  The Household Survey (where they actually pick up the phone and call families) showed us that we LOST 233,000 jobs in May.  Ouch.
   So, now we have the Government’s Bureau of Labor and Statistics saying that we created 138K new jobs, but the actual Household Survey saying that we lost 233K.  The difference lies in the fictitious ‘birth/death’ model that injected 230,000 fake jobs into the May report.  These jobs do NOT exist, and are often adjusted off – after the fact.  If it was just the lousy jobs number, I could possibly have given things a pass – but Challenger Grey came out and said that layoffs increased by 40% last month.  Factually:
-       Radio Shack has closed 1000 stores since Memorial Day.
-       Payless has closed 800 stores, rather than the 400 previously announced.
-       The Manufacturing PMI hit a 9-month low.
-       Ford and GM are pondering layoffs.
-       Subprime auto loans are going belly up at an increased rate.
-       U.S. April Construction Spending FELL 1.4%.
-       Pending Home Sales FELL the most in 3 years.
-       Toyota May sales FELL 0.5%.
-       Mortgage applications and the price of oil FELL dramatically.

   Is this market simply climbing a wall of worry?  Nope, it’s climbing the wall of Central Bankster hopium.  On February 13th, the DOW pushed above 20,400 and spent the next 3.5 months bouncing between 20,400 and 21,000.  We have now broken out of that range to the upside – with the DOW closing Friday at 21,206 and the S&P at 2,439.  Is the next stop for the S&P 2,450?   Why not?  If declining jobs, rising layoffs, closing malls, bad auto sales, dropping manufacturing doesn't stop things – what will? 
   The only thing that made sense this week was that the bond market continued to move higher.  Normally stocks and bonds move in opposite directions, but this week they both moved higher.  Phil Orlando, equity strategist at Federated Investors, explained that equity and bond investors are making different assumptions.  “Bonds are rallying because the jobs report was a disaster. Every other major metric we look at inside the report was poor.  The Treasury market is reading the jobs report as supporting the view that the U.S. economy is losing steam, and betting that the Federal Reserve will either opt not to raise rates at its next policy-setting meeting mid-June, or slow the pace of coming rate increases.  The prospect of lower rates for longer encourages investors to hold on to Treasurys, particularly if they assume a sluggish economic pace ahead.”  But Orlando continued to say: “Investors, who drove stocks to a string of records in the wake of Donald Trump’s presidential election victory in November on promises of deregulation, tax cuts and an increase to infrastructure spending, have tempered policy expectations.”  Mr. Orlando went on to say that: “The market may be betting that weakness in employment will force Trump & Company to scramble to figure out a way to push his agendas through.  This will require the Republicans to say, ‘We have to get our act together.’” 
   I think we are in the late stages of a 1999’esque blow-off top – that will end spectacularly.  For now, I think the only way to lean is long.  That said, keep an eye on the gold miners, as I think that is where the next 100% movers will be.  Miners that were $6.75 in February, are sitting at $2.85 now.  I don't think it's a stretch at all that they can go back to $6 – and even to $9 where they were 18 months ago.  Right now, the FAANG stocks, and the big names like MMM, DE, and even CAT are the market leaders.  All I can say is: “The trend is your friend until it ends.” 


“This week has the capability to be explosive.”

   This coming week has the capability of being truly explosive.  The X-Director of the FBI (James Comey) testifies on Capitol Hill on Thursday regarding President Trump’s Russian involvement.  This latest political installment only makes the road that much longer to meaningful tax reform and fiscal stimulus.  After all, stocks have set numerous records over the past months on expectations that Trump will usher in a more business-friendly era through tax cuts and ramped-up fiscal spending.  The past 2 weeks have shown the markets putting together one of the most explosive 11-day moves to the upside.  In each of those weekly sessions, we exceeded the S&P expected move – and that’s something that has NOT been accomplished in the last 3+ years.

Last week’s recommendations were 5 for 5:
-       WYNN – Sold the June 2, at-the-money put credit spread = 100% profit.
-       MSFT – Bought the July 21: 70 Call = continues to climb higher.
-       VRTX – Bought the June 16: +117 Calls = up 300% and still going.
-       AMZN – Bought the July 21: 990 Calls = up and looking for a target of $1,070.
-       AAPL – Bought the June 16: 150 Calls = up and looking for new highs above $157/share.

   The reason the markets performed the way they did last week was due to what’s called a ‘short gamma squeeze’.  The fact that in the past 2 weeks the S&Ps have closed above their expected moves – is a rare sign of market inefficiency.  I’m seeing hedge funds selling premium on the S&P’s and being forced to cover their premium sales by buying S&P futures.  Now that’s nothing new – except for the fact that currently the S&P has two very weak sectors: the financials (XLF) and energy (XLE).  Because of these weaknesses, firms are finding that buying NASDAQ futures are better ‘relief bets’ on their S&P hedges, than buying S&P futures directly.  This (in return) is making the NASDAQ (/NQ) an inefficient product, and in the past two weeks the NASDAQ has exceeded its expected move by almost 50% each week. 

   With all of these hedge funds buying NASDAQ futures, those firms (in turn) are being forced to go out and buy the underlying NASDAQ products such as: Apple, Amazon, Google, Facebook, and Netflix (FAANG).  So, it’s NOT the J.Q. Public’s or the mutual funds that are buying the FAANG stocks and driving this market higher – but rather the hedge funds buying futures, and the futures firms backing up those buys with the purchase of the individual stocks.
   Next week, the SPX (2338) is looking at a $20 expected move, and should stay in a range between 2418 and 2458.  The energy sector (XLE) has been in a downtrend forever, leaving the financials (XLF) to be the deciding weekly factor.  This past week’s volume in the XLF (even with it not moving) – is monumentally large with the tug of war going on between the financials and the bonds.  These past couple of weeks have seen the bonds rocket higher (see below).

   Looking forward, respect the move in the bonds.  While the bond market is exploding higher to the upside – the impact to the XLF has been negligible.  If the bonds roll over, that means that the S&Ps should quickly move to 2500.  However, please be defensive.  There are times when people should be exuberant with markets move to all-time-highs – this is NOT one of those times.  Right now, everything requires extraordinary risk because we are seeing inefficiencies in the major asset classes.  We are seeing inefficiencies in the bonds, and if the bonds continue to rally past the 155 level (where they are) – we should all ‘duck-n-cover’.  The fear of missing these markets to the upside is something that should NOT be on your individual radar(s).  Therefore, my recommendations should ONLY be played if you are nimble, and with very small size. 

   This week’s recommendations:
-       GBTC – The Bitcoin ETF - bought shares due to increased popularity.
-       VRTX – Bought the June 16: +117 Calls = up 300% and still going.
-       AMZN – Bought the July 21: 990 Calls = up and looking for a target of $1,070.
-       AAPL – Bought the June 16: 150 Calls = up and looking for new highs above $157/share.
-       WY – Weyerhaeuser Corp. – July 21 - $34 Puts – do with small size.
-       NUE – Nucor Steel Corp. – July 21 - $60 Puts – do with small size.

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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