This Week in Barrons – 1-29-2017:
Over the years, I’ve spoken many times about how our Central Banksters are enormous buyers of stocks. I’ve mentioned how the Bank of Japan owns almost 75% of Japan’s ETFs. I’ve spoken about the Swiss National Bank owning billions of dollars’ worth of Apple (AAPL), Microsoft (MSFT), and Exxon Mobil (XOM). And I’ve talked about how our companies are borrowing money at virtually zero interest rates, and using those same funds to buy back their own shares of stock. Just this week, Zero Hedge ran a story on how Central Banks plan on buying even MORE stocks – which begs the question: Can stocks ever really go DOWN? Given Central Banks can both print money out of thin air, and buy stock: How can you ever take a beating?
The answer comes from ‘where’ the money came from. In normal times, you were paid a commensurate wage for your work. So, the amount of money that was in circulation at any given time was directly proportional to the number of goods and services that existed in the world. This kept production in line with demand, and it also kept a lid on pricing. But when the Central Banksters started creating billions and buying stocks, the entire process of consumption being linked to creation and demand was thrown out the window. And what was put in its place was the absolute definition of inflation.
Many people define inflation as "rising prices", but in technical terms that’s simply the result. The true definition of inflation is: "an increase in the money supply". I personally can’t think of a better example of an ever-increasing money supply than our Central Banksters creating money out of thin air, and using it to instantly buy stocks. They are clearly doing it without any productive input to the global economic machinery.
Schemes like this often work in the short term, but go awry because some event causes an increase in the velocity of money and that causes prices to spiral higher. The velocity of money is simply how fast a dollar changes hands. In a hot economy, the velocity is high because everyone is out spending all that they can get. In a sluggish economy, monetary velocity slows as savings increase.
Historically, printing money has never worked. While the injection of money during periods of economic contraction has (at times) been able to keep the wheels from coming off an economy – continued injections lead to runaway inflation. Inflation is starting to become an issue, and will become a larger one over the next several months and years.
A couple thoughts to consider – (courtesy of SF):
- 4th Quarter GDP came in at 1.9% on Friday – well below the estimates.
- Neil deGrasse Tyson said: “Congress and Donald Trump are considering cutting PBS support (0.012% of the budget) to help balance the Federal budget. This is like deleting your text files to make more room on your 500Gig hard drive.”
- "It's cheaper to buy a $35,000 robotic arm than it is to hire an inefficient employee – making $15 an hour bagging French fries," … former McDonald’s CEO Ed Rensi.
- The South China Morning Post reported that Foxconn (a supplier to both Apple and Samsung) has recently REDUCED total employment by 60,000 people with the introduction of robots.
- More than 67% of U.S. assets are controlled by individuals over 50 years old. Bankers are viewing the ‘Reverse Mortgage’ as the final opportunity to lend to the 50+ generation. In that vein, Fifth Third Bank ($141B out of Ohio) will acquire Retirement Corporation of America (RCA) – a registered investment adviser providing retirement education and planning nationwide.
- We need to revise our educational system:
o University enrollment has increased 20% over the past decade.
o University costs for tuition, fees, room, and board have risen 34% over the past 10 yrs.
o Over the past decade, University endowments have increased over 80%.
o Over the past 10 years, our Universities are spending more money on building monuments, than they are on improving the teacher to student ratio.
o Maybe Universities should be taxed like Mutual Funds – after all:
§ The top 10 University endowments are: (1) Harvard = $36B, (2) Yale = $26B, (3) Texas = $24B, (4) Princeton = $23B, (5) Stanford = $22B, (6) MIT = $13B, (7) Texas A&M = $10B, (8) Northwestern = $10B, (9) Univ. of PA = $10B, and (10) Univ. of Mich. = $10B.
§ Some Top ETFs are: (7) QQQ (NASDAQ) = $42B, (10) IWM (Small Caps) = $34B, (16) GLD (Gold) = $30B, (20) EEM (Emerging Mkts.) = $26B, (22) XLF (Financials) = $22B, and (30) XLE (Energy) = $17B
o With our universities having larger endowments than most of the ETFs out there, I think it’s time to refocus our educational system around the educator rather than around the endowment or the physical facility.
Animal spirits are alive and well. For the first time in my life, I'm watching a man go to Washington, and totally change the entrenched political decision-making. In the past, a President would over-promise, under-deliver, and in many cases, do a 180 degree turn against what they said on the campaign trail. Trump is definitely NOT playing that game.
But even with all of the hope, the reality of the moment is that things aren't very good, and the market is front running all the good things that are potentially coming. This week the DOW made it over 20K, and held above that level for 3 days. However, it came with anomalies that caused me to raise an eyebrow. According to the latest Bank of America data, last week U.S. equities saw $6.3B in outflows. This was the largest weekly redemption from U.S. mutual funds and ETFs in four months. So, at the very time that the DOW created all-time highs, $6.3B was pulled OUT of the markets. Also, the day we hit 20K, trading volume on the SPY (the largest ETF) was only 84m shares. The following day volume on the SPY went down to 60m shares, and on Friday it hit 59m shares. In other words, there has been no volume confirmation of this move.
So, $6.3B is leaving equities and being deployed into bonds, and we have a clean break-out to all-time historic highs on relatively low volume. These are NOT the sorts of actions that I would have expected last week. But then again, I'm using analysis based on some fundamental premises, and fundamentals went away ten years ago. Who cares if pension funds and insurance companies are pulling out – just as long as the Swiss National Bank keeps buying the DOW stocks and driving them higher. I still think that we get this last run higher, pull in more sideline sitters, and then roll over into a 10% correction.
Over the past several weeks, I laid out a specific SPX trading strategy that I was doing. I started by selling some weekly Iron Condors (IC) – expiring January 20th – between 2260 / 2265 and 2290 / 2295 – for between $230 and $245 per IC. I was hoping to show some of the modifications that I had to do, but the SPX acted remarkably calm – ending the week @ 2271. Therefore, I pocketed the entire $245 per contract. Last week I sold a similar set of weekly SPX Iron Condors – expiring January 27th – between 2245 / 2250 and 2280 / 2285 for $250 per IC. The SPX went to 2295:
- This allowed our 2245 / 2250 Put Credit Spread portion of the IC to expire worthless and I pocketed the entire $130 per contract.
- BUT we had to roll out the 2280 / 2285 portion to the corresponding Feb 3rd delta 30 options centered around the 2310 / 2315 strikes for $1.85.
- That $1.85 came directly out of the previous SPX’s $2.45 profit – reducing our profit on the Jan 27th transaction to 60 cents.
- We are now holding the 2310 / 2315 Call Credit Spread @ $1.85 / and will sell the 2275 / 2280 Put Credit Spread against it on Monday – for an additional credit of $1.40.
I will continue this example through this week, in hopes that it should give you enough to do this on your own moving forward.
I’m attending a financial conference in Rocky Mount, NC this weekend – and will hopefully incorporate those thoughts in my upcoming trades and recommendations.
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.