This
Week in Barrons – 9-17-2017:
“This market is like a porcupine – always respected, but never loved.” …Arthur
Guiterman
Thoughts:
Potentially the largest
‘prickly’ event this past week was the continued geopolitical
tension between the U.S. and North Korea. President
Trump’s U.N. address was strongly focused on North Korea and Iran. And Kim Yong-un of N.K. responded: “I will
make the U.S. pay dearly for his speech.
I will tame Trump with fire."
But it’s natural for North Korea and the U.S. to continue butting heads because
the Korean War never ‘officially’ ended.
Korean
War casualties (1950 – 1953) saw over 3m Korean dead, injured and missing – 10%
of their total population. Officially, there
was simply an armistice – a cease-fire between military forces. No peace treaty was ever signed, and therefore,
the Korean War wages on. The population
of North Korea has been separated from the outside world so long that they
truly believe that Kim Jung-un is a God. But why are they acting so ‘pointed’
toward the U.S.? Simple, Kim Jong-un has
seen us overthrow dictators in Iraq, Libya, and currently Syria. The common thread was that none of those
countries had nuclear weapons. But
couldn’t we just launch an attack and take out his nukes. Yes, but N.K. has so many conventional
weapons pointed at South Korea, that no matter how hard and fast we strike,
they could easily kill 30,000 South Koreans in the first hour. And, the President of South Korea has told us
that they do NOT want us doing that.
Recently, President Trump announced that China directed
its Central bank, to contact all their member banks and tell them NOT to do any
financial business with North Korea. It will be interesting to see what trade
and South China Sea concessions China expects in return. But if they push hard enough, Kim will
eventually have to make a move. He's
either got to fold up his nuclear program, or allow his nation to starve to
death. If he backs down on his nukes, he looks weak to his people. And
if he continues with his nuclear programs, his people will starve, lose faith,
and commit mass suicides. If the
suicides start, Kim could figure that his days are numbered, and try to take
out as many of us as possible before his overthrow. One thing is certain,
the financial markets aren’t bothered by it. In 2007, the market didn't
care about the housing and mortgage bubble, and then in 2008 we had the biggest
crash in decades. The financial markets aren't
as smart as everyone thinks. If China can't pull it off, or if N.K. makes
a mistake and drops a missile on Japan or Guam or one of our ships – then the
gloves come off.
Diplomacy has often been called: “The business of
handling a porcupine without disturbing the quills.” The porcupine cannot eat when its spines are
erect. And if it doesn’t eat – it will
starve. And it if starves – the
‘prickly’ spines will die with the rest of the body. North Korea, here’s hoping that diplomacy
comes first.
Switching gears: MJP pointed out that Uber got itself in
a bit of a ‘sticky wicket’ this week. Effective
September 30th, Uber has lost its license to do business in
London. London is one of Uber’s largest
and most lucrative markets, with 40,000 drivers and 3.5 million people
using its app. Uber won’t take this one
lying down.
It also seems that both Ford and GM are going through a rather
‘thorny’ patch as of late. Ford recently
scheduled downtime at five production facilities and GM is laying-off over
1,000 workers – both due to slowing automobile sales. Whatever happened to all of those cars that
would be purchased due to Hurricanes Harvey and Irma?
Toys R Us is even feeling
a little ‘bristly’ as last week they filed for bankruptcy protection. It appears everyone is buying their fidget
spinners online, and that has left Toys R Us hundreds of millions of dollars in
debt. For now, most of its stores will
stay open, but things ‘R’ definitely looking a little ‘spiny’.
Last week the SEC yelled: “We’ve been hacked.” They found that last year one of their electronic
filing systems that stored corporate disclosures (non-public information) was
breached. The good news was that no
personal data was compromised. The ‘touchy’
news was that the hackers profited off of trades they made using the stolen
information.
The Markets:
“A Skill is successfully walking a tightrope.
Intelligence is never trying it.” … Marilyn vos Savant
Factually:
-
This week the
FOMC announced that it would raise rates one more time before the end of the
year, and said that it would begin a $10 billion a month unwinding of its $4.5T
balance sheet – starting in October. The
reduction would increase by $10B per quarter until a ceiling of $50B per month
is reached and maintained. It will take about
10 years to reclaim their assets. Most
economists agree that it never achieved the intended results – so let the games
begin.
-
MJP reminded me
that Automobile default rates registered their largest increase since
2011. But that’s ok because with declining auto sales and the normal
end-of-year push to make room for newer models – I’m sure easier credit
conditions are right around the corner.
Yet again, we get to lend more money to people who can’t pay it back – using
the excuse that: ‘We’ll make it up on volume’.
-
Speaking of
disasters, it seems that the world desperately wants OUT of the U.S.
dollar. China and the BRICS are trading
for oil in their own currencies. Venezuela
will no longer accept dollars for oil.
And now Russian President Vladimir Putin has instructed his government
to approve legislation making the ruble the main currency of exchange at all
Russian seaports by next year.
-
2 weeks ago, we
talked about a blockchain ‘smart contract’ that could repossess your TESLA
without human intervention. One barrier
to that implementation would have been the regulatory uncertainty surrounding
whether the smart contract would be enforceable. The State of Arizona
appears to be setting the pace on that as it recently passed an amendment to
ensure the validity and enforceability of digital signatures recorded on blockchain
contracts. In doing so, it offered a
boost to smart contract utility – placing them on a legal par with traditional contracts. This positions Arizona as a solid place to set
up a blockchain company, and also broadcasts to other jurisdictions that a
constructive approach is both possible and productive.
-
Last week
Cambridge University came out with a comprehensive 114-page study on
cryptocurrencies that looks at the digital currency world from an empirical
data perspective. Key highlights of the study include the number of users
and wallets, the burgeoning cryptocurrency industry sectors and the impact the
technology is having, as well as interesting information about exchanges,
payments and mining.
-
Lately bitcoin
has entered bear market territory; however, a 30% pullback after such an
amazing rally this year should not come as any surprise. There were many of these corrections on bitcoin’s
journey to $5,000, and those who had the stomach to sit through them have been handsomely
rewarded. Some critical crypto-levels follow:
BTC (3,669) – Bitcoin
fell from $4,975 to its 50% Fibonacci retracement level of $2,974. It has strong support at $3,500. If it breaks that level, then the final
support is at $3,409, which is
the 61.8% Fibonacci retracement. Long
positions can be added once Bitcoin breaks out and closes above
$4,113.15. Traders should refrain from buying on dips because a breakdown
below $2,974 will be very bearish.
ETH (280) – Ethereum’s fall to the $240 area was
predicted, but if it breaks below that it is likely to fall to $223 – which is 78.6%
Fibonacci retracement level. If that
level also breaks, then the digital currency will retest the lows at
$200. Traders should wait for a breakout above $312 to initiate any long
positions.
LTC (48) – Litecoin is also in a strong downtrend. If it doesn’t find support at $45, it is
likely to fall to $42 and after that to $38.
Litecoin will not be out of the woods until it breaks out above the $60
level.
Right now, there's very little that I want to buy-n-hold in
this market, simply because it's not wise to buy-n-hold after a 9-year gallop
to all-time highs. Moreover, the economy
was being pushed by banksters printing money NOT by organic growth, and the
banksters are stopping some of the printing presses. What’s the end game here? The ECB currently owns 11% of all European
Corporate debt. Do they plan on owing 90%
of all companies in Europe? The Japanese
Central Bank owns over 50% of their stock market – is their goal to own 90%? It sounds too incredible to believe, but
that's the path they're on.
Even the Bank of International
Settlements (BIS) in their August writings seemed a bit confused about what to
do with the situation. They hit on
several topics including: the enormous debt situation, stagnating wages, and
how Asia provided the world with cheap labor – robbing other nations of that
advantage. They talked about how low
interest rates could help to pay off our debt, but how it also encourages people
to borrow more – increasing the debt. Right now, global debt and unfunded liabilities are
out of control – totaling $2.5 quadrillion.
[Debt = $240T, Pensions = $400T, Medical = $250T, and Derivatives = $1.5
quadrillion]. This level of indebtedness
cannot be paid back. And what can't be
paid – won’t be paid. But it’s their
last sentence that caught my eye: "There is no silver bullet, but we recommend policy measures to switch
from debt to equity finance."
What the heck is equity
finance? Are they talking about corporations
and governments issuing more equity paper such as stock? Or about using equity in corporations (that
central banks are accumulating) as collateral against their outstanding loans? One thing is certain – this isn't your
father’s market any more. Something's
going on, and we’re all living through it.
I can argue about this insanity, as we have no choice but to tag along –
being long these markets until something changes. I’m playing in the financials, the ‘hurricane
rebuild’ stocks, and taking what the market will give me.
Tips:
This
week played out with Gold pulling back under $1,300/oz. and Crude Oil consolidating
over $50/barrel. The U.S. dollar held
steady, and Treasuries moved slightly lower. The index ETFs did show some investor rotation
with the S&Ps (SPY) remaining steady, the Nasdaq (QQQ) rolling lower, and
the Small Cap Index (IWM) pushing to all-time highs. What does this mean for the coming week? Equity markets could continue to see some short-term
rotation out of the Nasdaq and into the Small Caps as the end of the 3rd
quarter approaches. I’m looking for a
pause in both Gold and Crude Oil. The U.S.
dollar will continue to move sideways and down, while our Treasuries will see
their uptrend at risk.
Factually:
-
The S&Ps ended
the week at 2,502.22 – marginally higher than where they started (2,500.23).
-
The tech-heavy Nasdaq declined by -0.3% to finish at
6,426.92 – within a couple pennies of its downside expected move.
-
Only the Dow Jones Industrial Average finished higher at 22,331.92 –
again within cents of its upside expected move.
-
Mortgage rates went up for the first time in
nearly two months. According
to Freddie Mac, the interest rate on a 30-year fixed rate mortgage increased to 3.83%, after topping 4% in
mid-July and hitting 4.32% last December 2016. With the FED planning on raising interest
rates one more time in 2017 and three more times in 2018, the cost of financing
a home will continue to rise. Also
because the FED will be reducing its balance sheet moving forward, this will
also put upward pressure on rates.
This week Apple reminded us of what
a really bad iPhone launch looked like.
It was the worst in Apple’s history.
Apple launched the
new iPhone 8, iPhone 8 Plus, Apple Watch Series 3, and Apple TV 4K. Apple (AAPL)
shares have fallen over 7% since their September 12th announcement –
making it their worst monthly performance since April 2016. If you’re feeling nervous about Apple and
others like it, and would like to hedge your portfolio – the following ‘risk
twist spread’ should be comforting for you.
The trade offers an excellent 1
to 10 (risk to reward) ratio. Meaning
you would risk $100 to make $1,000 if the S&Ps would decline 10% anytime
between now and January 19th, 2018.
Risk Twist Spread:
-
SPY = Jan 19 –
2018 / PUTS = Sell (1) 245 / Buy (3) 235 / Sell (1) 233
-
Notice: virtually
no upside risk – and a nice hedge to the downside.
Recommendations:
Bullish: (Sell PCS = Sell
a Put Credit Spread):
-
Apple (AAPL = 151.89) – Sell PCS – Sept 29: +147 / -148,
-
Applied Opto
(AAOI = 63.80) – Sell PCS – Sept 29: +58 / -58.5,
-
Lumentum Hldgs (LITE = 55.10) – Sell PCS – Sept 29: +52 / -52.5,
-
Restoration Hdwr (RH = 72.22) – Sell PCS – Sept 29: +66.5 / -67.5,
-
SPX Futures (SVXY = 89.11) – Sell PCS – Sept 29: +82 / -83,
-
T-Mobile (TMUS = 64.06) – Sell PCS – Sept 29: +60 / -60.5,
-
Small Cap Bull (TNA = 59.60) – Sell PCS – Sept 29: +52 / -52.5,
-
UltraBull QQQ = (TQQQ = 111.88) – Sell PCS – Sept 29: +102.5 / -103.5,
-
Weibo (WB = 100.04) – Sell PCS – Sept 29: +91.5 / -92.5
-
Axovant Sciences
(AXON = 24.99) – Sell PCS – Oct 20: +12.5 / -15,
-
DBV Technologies (DBVT = 43.46) – Sell PCS – Oct 20: +15 / -10,
-
Zogenix (ZGNX = 14.4) – Sell IC – Oct 20: +3 / -12 Puts to -14 / +22
Calls
My Crypto-Currency Holdings
Include:
-
Ethereum (ETH),
Litecoin (LTC), Dash (DASH), Digix (DGD), MaidSafeCoin (MAID), Metal (MTL), OmiseGo
(OMG), PIVX (PIVX), Patientory (PTOY), Steem (STEEM), and NEM (XEM).
To follow me on StockTwits.com to get my daily thoughts and trades – my
handle is: taylorpamm.
Please
be safe out there!
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