This
Week in Barrons – 10-12-2014:
“What line were you in when they were giving out testicles?” … The
Judge (the movie)
Dear
Ms. Yellen:
Do you
remember in 1973 when FASB (the Financial Accounting and Standards Board) began
regulating a company’s financial reporting according to GAAP (Generally
Accepted Accounting Principles)? GAAP is
an excellent, ‘real’ representation of a company’s health. It seems, because GAAP is so clear and
hard-hitting, that we have allowed our companies to fall back and report on a
‘Pro-forma’ basis. ‘Pro-forma’ accounting
allows a company to EXCLUDE any transactions (mostly expenses) that it believes
can obscure the accuracy of its financial outlook. These excluded transactions (called ‘ex-items’)
are reported separately. For example, between
2007 and 2010, companies reported $1.87T in real earnings, and correspondingly over
$550B in Pro-forma ex-Items. It was this
$550B, which allowed over 78% of our corporations to ‘make’ (rather than
‘miss’) their earnings estimates. I was
thinking (as we enter yet another earnings season), what if we forced companies
to return to GAAP accounting? If you
forced companies to ‘Man-Up’ to
their real earnings, wouldn’t that be a good thing in terms of transparency and
understanding?
Ms. Yellen,
when QE was first introduced – did you realize that it would have such a
‘slowing’ effect on the ‘velocity’ of money.
I have to think that when Ben Bernanke can’t refinance his mortgage –
banks aren’t lending enough. And you
can’t blame them because banks earn larger returns by investing all of your
interest free money back into the stock market.
But, by investing in the stock market, it means that banks are NOT
investing in mortgages, and that does fairly dramatically slow down the
‘re-circulation’ of money. It also slows
down inflation. Honestly, inflation should be between 3% and 4% by now; however,
the CPI (Consumer Price Index) is only up 1.7% and your inflation measure (the PCE
deflator) is only up 1.5%. On one hand you have 5.9% unemployment, you’re stopping
QE, and increasing rates – while on the other hand you have deflationary
pressures and the dollar is rallying. I
think you’ll agree that the strong dollar (although good in the short-term for
the voters - lowering gasoline prices) is bad for the markets, government debt
and deficits. Aren’t we all going to
have to ‘Grow a Pair’ and just
realize that our stock market should be around 10,000 and not 16,400 – and
accept the crash that is coming?
Ms. Yellen – globally we
going to have to grow a ‘Major League
pair of Cajones’ in order to continue to ignore:
-
Germany’s
industrial production crashing to lows not seen since 2009 – due mainly to U.S.
sanctions on Russia.
-
Yields
on French Bonds are seeing their lowest rates in 250 years.
-
Greece is
defaulting – yet again.
-
China is
creaking and groaning due to over-building – not to mention clashing with Hong
Kong.
-
Russia is
still invading the Ukraine,
-
ISIL is
still attacking IRAQ and Syria,
-
The
International Monetary Fund (IMF) lowered its estimate for global growth for
the 3rd time this YEAR.
-
And Ebola
is beginning to have a real impact on travel and decision-making.
Lastly, Ms.
Yellen your FOMC meeting (on October 29th) directly precedes the November 4th
midterm election. If you stick to your
path of ending QE and continue talking about increased interest rates – you
could really sound the ‘death knell’ for the Democrats in the midterm elections. Wouldn’t it be easier and more ‘democratically’
accommodative to announce QE4 – on October 29th – just 6 days before
the elections? And let us not forget,
the last time the FED announced a QE (QE3) it was September of 2012 – directly before
the Presidential elections. So I truly think
on October 29th, every member of the FED is going to have to figure
out: “Which line they were all in – when
they were giving out Testicles.”
The Market:
A couple weeks ago I
devoted a large portion of this newsletter to a potential pullback in the
market. I explained all the reasons, the
warning signs that were flashing, and how we could be looking for our first,
true 10% correction in over 3 years. We
did get the pullback, and (as usual) it magically stopped when the market was
down 4.5%. That is exactly what happened
on Wednesday when we got that ‘insane’ 280 point bounce, which looked (once
again) like they were going to just let it rip back to the upside, and take us right
back to the highs. But on Thursday –
someone didn’t get the memo – because instead of following through with a nice
green close – we fell for 300 more points.
And then (as if to add insult to injury) we lost another 115 points on
Friday – falling over 445 DOW points in 2 days.
Therefore, we are at a
very interesting place indeed.
-
The
Russell 2000 has completely broken down,
-
The VIX
(fear index) jumped over 30% on Friday,
-
The TLT
(bond index) increased substantially on Friday,
-
The DOW
is under it’s 200-day moving average, and
-
The
NASDAQ and S&P are sitting at their 200-day moving averages (that have not
been broken since 2012.)
This week starts earnings
season. On Tuesday and Wednesday we're
going to receive earnings from most of the major banking institutions. Will they show enough ‘Pro-forma’ earnings to
make everyone believe that all is well and jam us higher, or are we really
going to finally see our first real correction?
I want to say that this time it is different, and they're NOT going to
reverse this any time soon and jam us higher.
But just saying that brings ‘shivers’ to my spine.
I think that the FED will
try for a bounce on Monday, because the bond market is closed for the Columbus Day
Holiday. I think that ‘bounce’ will
carry into Tuesday and Wednesday and then it’s all up to the earnings in the
financial sector. I think if the
financial sector cannot ‘kick it in gear’ in a major way, then ‘yes’ we are
headed considerably lower.
For Monday, watch the
200-day moving average on the S&P.
If that fails (with or without the banks), we are going considerably
lower. FYI: If we get a real 10%
correction, the DOW will be dropping an additional 1,000 points. So hold on to your hats.
Tips:
Factually:
1.
Bloomberg
reported that companies in the S&P are poised to spend $974B on buy backs
this year, which is 95% of ALL their earnings.
2.
Wal-Mart
(the single largest employers in the U.S.) announced that it is ending
healthcare for its part time workers because it's too expensive.
3.
The difficulty
with the markets gaining any footing quickly is the huge headwind coming from
the energy sector, where the combination of horizontal drilling and fracking is
transforming the industry. Supply is simply booming and prices are
falling. Back in 2005, the US was importing ten-times (10X) as
much oil as it was exporting; now that ratio is down to two-times (2X) and
headed lower. In the next few years, the US could easily become
a net exporter of petroleum. These forces are creating disarray in
OPEC. Saudi Arabia is willing to accept lower prices for oil,
undercutting other oil exporters in the Middle East as well
as Russia. West Texas Intermediate, which was $104/barrel in late
June is now approximately $86/barrel, and probably has further to fall.
I predict
that the next FOMC meeting (at end of October) will sound far more dovish, and
will halt or reverse course from their current mentality. For optics sake, they may wind-down and end
the QE3 program, but that will be coupled with a new accommodative policy and
certainly long-term zero interest rates. If they maintain their hawkish tone, this
market will come under a huge amount of pressure and it would be damning for
the Democrats in the upcoming midterms.
Remember, the market saw corrections of 15% to 18% following the ending
of QE1 and QE2. And, other than the
midterm elections – why should this time be any different?
In terms of my own
portfolio, I’m fairly ‘ruthless’ in cutting stocks that are declining in a
downturn. My mantra is: “Re-Entry is
just a Commission away.” I either use
the a) 2-closes below the 21-day moving average rule, or b) trailing stops to
sell during a downturn.
My current list of potential candidates is as follows: I still like the indexes RUT, SPX, and
NDX. As far as individual names: CME, CBOE, MON, UA, PRU, STJ, ABT,
WYNN, IYT, TRV, FDX, UTX, MYL HERO and TEX. I like the biotech sector as
well with names such as VRTX, AMGN, REGN and IBB beginning to look interesting.
My
current short-term ‘Larger-Cap’ holds
are:
-
KO (Beverage) – in @ $41.17 – (currently $44.42),
My short-tem
‘Small-Caps’ holds are:
-
IG – in @ $7.27 – (currently $8.43),
To
follow me on Twitter and on StockTwits to get my daily thoughts and trades – my
handle is: taylorpamm.
Please
be safe out there!
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