This
Week in Barrons – 11-2-2014:
“How
do you know if you’ve got a good mechanic?
By the size of his boat!” … Tom Magliozzi (co-host of NPT’s Car Talk radio
program) – passed away on November 3rd from complications of
Alzheimer’s disease. He left us a lot of
knowledge and laughs:
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“Do it while you're young. You may never have another
chance to do anything this stupid again!"
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"Life is too short to own
a German car."
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"If it falls off, it
doesn't matter."
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"Never let the facts
stand in the way of a good answer."
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“If I left work any earlier, I’d pass myself
coming in.”
Dear Ms. Yellen:
Ms. Yellen, are we sure that we’re on
the right track with jobs? The ‘Jobs’
Report (released last Friday) showed that we created 214,000 jobs in October –
lower than expected. It was a 14%
decrease from the 248k gain reported in September, and an identical decrease
from a year ago. If I subtract the
‘fake’ birth/death model jobs (137k), I show a net gain of 77k jobs in October
2014 – with 42k of those jobs being low-paying jobs in the food and beverage
industry (waitresses and bartenders). Education seems to matter when getting a job
as unemployment for 25+ year olds with a Bachelor’s degree is 3.1%, but for
those without a high school diploma the rate is 7.9%. You can’t be happy about the U6 total unemployment
rate hovering around 12% are you? What’s
worrying me is that the ‘Challenger’ lay off report for October had layoffs
rising by 68% over the previous month.
This is especially worrisome given many companies go on hiring sprees
prior to the holidays.
Ms. Yellen, in terms
of the election – I think stocks prefer a slow moving government. With a
Democrat in the White House and a Republican Congress, this stalemate is
something that Wall Street will like. In
the 90’s, the last 6 years of the Clinton administration had a Republican
Congress and provided an ideal investing environment. This same notion held true in the 80’s when
the Democrats controlled the Congress under Reagan. But some of the post-election comments that I
heard were disturbing:
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Only
22% of our citizens believe that their children will have a ‘better’ life than they
do.
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People
can’t get mortgages because banks are ‘parking’ their FED money back in the
FED, or in the stock/derivatives market.
-
People
can't afford to buy a car because their wages haven’t increased in 15 years, so
the 3-year lease is all that they can afford.
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People
can’t afford to send their kids to college because it costs an average family
over 5 years wages to do so.
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And
people are angry at Obamacare because their premiums have increased
dramatically.
Ms. Yellen, I’m
seeing our energy boom cause a real clash between politics and economics. The 1920 Mineral Leasing Act allows U.S. oil producers
to sell only a tiny amount of oil abroad.
Even though our oil production has increased 32% since 2008, we only export
47k barrels a day versus importing 8M barrels.
So if the Republicans push for
more oil and natural gas exports, the industry should grow larger and
employment should increase significantly.
However Saudi Arabia, for the first time since the oil embargo in 1973, has
taken a direct and defiant stance against the U.S. They have publically announced reduced export
prices on oil to the U.S. while simultaneously increasing supply. I think that this is designed to squeeze the
profit margins on the more expensive U.S. shale-oil production. It’s my thinking that U.S. shale production
costs are in the $70 per barrel range, while OPEC production costs are in the
$40 dollar per barrel range. Lately, the
price of oil has steadily decreased from the $92 per barrel area, through $80
per barrel, with the next stop being $72.50 and then ultimately $60.50 per
barrel. Ms. Yellen, if the U.S. and
Saudi Arabia are not able to find some common ground or solutions to this
stand-off – are you anticipating OPEC removing the U.S. dollar dominated oil
trade and move to some other standard such as gold? A move like this would destabilize the dollar
as a world reserve currency, and would most certainly devalue the dollar and
create inflation. Do you agree?
The Market:
This week I would like to
discuss two market elements, the first is the strong dollar, and the second is
Alibaba (BABA).
The U.S. stock market
(this week) continued to rally on the backs of the strong dollar.
Historically, the dollar index started in 1973 at 100. It reached a high
of 164.72 in 1985 – before a nasty decline culminating in a low of 78.43 in
1992. From then until 1995, the dollar rallied to a zone of resistance
around 90 – 3 different times before faltering back down to about 80 in
1995. Post 2003, the dollar has tried and failed 7 times to rally beyond
the 90-level. Once again we are approaching that key 90-level.
A strong dollar means that
the world considers the U.S. market and the U.S. consumer to be the strongest. It also means that commodity prices
(including gasoline, gold and silver) will continue to plummet. The dollar index has soared to 87. I am
looking for the dollar to continue to rally to 90 – which could happen over the
next 6 to 12 months. Then it should stall and potentially have a strong
pullback. This pullback will be the 30%
correction that I have been looking for, and will represent the buying opportunity
of a generation.
Why do I think that it
will take another year or so to correct?
When I look back over the past 40 years, all of the recessions have
happened during a Presidential transition. The ‘82 recession, the ‘93
recession, the 2001 recession, and the 2009 recession have all happened when
there was a change of power in Washington. In 2016 there will be a change
in power that I think will align with both a recession and a market correction.
After that, the dollar will begin to recover, break above 90, and head toward
its next major support level at 105. So, if you think stocks are high now
– you ain’t seen nothin’ yet.
In terms of the Chinese
company Alibaba (BABA), they reported earnings this week. Allow me to point out Alibaba’s size, its growth,
and its reach:
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The
number of annual active Alibaba buyers climbed from 279M a year ago to 307M. There are 319M people in the U.S., so Alibaba
has almost the same number of annual active buyers as there are people in the
U.S. Alibaba grew by 28M active users in
one year – which is more than the entire population of Texas. Its mobile users have surged to 217M monthly
active users, and its gross merchandise volume rose 49% from a year earlier.
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Because
the Chinese are moving up on the income ladder and gaining access to credit, China
is becoming more reliant on domestic spending.
-
The
Chinese population has enormous room for growth as a ‘flood’ of new consumers
and higher income earnings are coming on-line daily.
Therefore, I think that
the concerns about China have less to do with their domestic growth and more to
do with the BRIC bank, the U.S. dollar as a reserve currency, their oil and
gold purchases, and their international trade status. China’s economy is getting to a point where
their domestic economy can absorb virtually anything that the U.S. ‘can throw
at them’ – and that should scare us.
Tips:
This week the U.S. Mint
confirmed that they ‘sold out’ of silver one-ounce rounds. What is fascinating is
that under normal economic circumstances – when something ‘sells out’ you would
think that demand was indeed robust and you would then raise prices. In the case of precious metals, their price
is continuing to drop – directly in the face of dramatically increasing
demand. My thinking was that the Fed
itself was driving down the prices of gold and silver, in order for them to buy
and meet the redemption demands by foreign deposit holders like Germany and
others. Perhaps their plan is backfiring
in so far as too many individuals are capitalizing on the demand disparity
between paper and physical precious metals.
I think the price of gold settles at $1,033 per ounce.
It's been 17 trading days
since FED-head Bullard hinted that maybe the QE process should be
extended. Since that mention during the
depths of the 10% pullback, the DOW has gained 1638 points. That's an average of almost 100 points per
trading day. By virtually
every measure – this market is extended to the upside. We should see some consolidation, but without
a catalyst, we could just chop and drift higher. Right now, the biggest magnet for the S&P
is the 2050 value, and it is within striking distance – especially if the ECB does
a fraction of the QE that the Bank of Japan announced last week. This 2050 area has the potential to be
an area where the S&P remains for a while. So
bottom line, the higher we go in this market without consolidation – the less I
trust it. My guess is that we do
a bit of fading this week. It could be a
‘run of the mill’ 2 - 4% pull back, or it could again morph into something
deeper. After that pull back, I think
they'll re-group and shoot us higher into yearend. A common strategy is to watch the stocks that
hold up the best in a down turn, and then buy them for the upswing. My current list
of potential candidates is; GILD, IBB, AAPL, WYNN, FDX, BTU, ALL, PII,
HSY, FLR, BMY, DPS, TEX, SLW, IYT, TRV, UTX, KR and a couple interesting long
stock ideas in LAYN and HERO.
1.
Sold the NDX – December 2014 – Iron Condor –
3880 / 3890 to 4340 / 4350 – with a 1:4 risk/reward ratio and yielding $2.18
per contract
2.
Sold the RUT – December 2014 – Iron Condor –
1070 / 1080 to 1230 / 1240 – with a 1:3 risk/reward ratio and yielding $2.15
per contract
3.
Sold the SPX - December 2014 – Iron Condor –
1900 / 1910 – 2110 / 2120 – with a 1:3 risk/reward ratio and yielding $1.90 per
contract
4.
On Wednesday - consider selling the XLP
(Consumer Staples) – December 2014 – Iron Condor – 44 / 45 to 49 / 50 – with a
risk reward of 1:5
5.
On Wednesday – consider selling the XLU
(Utilities) – December 2014 – Iron Condor – 42 / 43 to 48 / 49 – with a risk
reward of 1:3+
6.
On Thursday – consider buying the XLU
(Utilities) – December 2014 – Butterfly – 47 / 49 / 50 – and sell the
off-setting Put-Credit-Spread to make this a no-lose trade.
7.
On Thursday – consider buying the XLP
(Consumer Staples) – December 2014 – Butterfly – 49 / 50 / 52 – and sell the
off-setting Put-Credit-Spread to make this a no-lose trade.
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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