This Week in Barrons – 11-8-2015:
Thoughts:
“Like
a kite dancing in a Hurricane” … Spectre (James Bond movie)
Dear Ms. Yellen:
The quote: “Like a kite dancing in a hurricane” came from the latest
James Bond movie – but can equally describe the U.S. economy. The world is choosing sides between China / Russia
and the U.S. / U.K. They have seen the U.S.
perform a Ukrainian coup – blame it on the Russians – impose sanctions against
Russia – and consequently cause Europe millions of dollars in lost revenue. They have also seen Russia destroy more ISIS
installations in a month than the U.S. has in the past year and a half. And now the world is questioning whether our
intentions in the Middle East are for taking down ISIS, or for destabilizing the
region (like we did in Libya and Iraq).
Last Thursday, Europe did something amazing that received virtually no
air play in the U.S. The European
Union's Parliament voted to DROP ALL charges against former National
Security Agency contractor: Edward Snowden.
The Parliament said: “Not enough has been done to protect the rights of
EU citizens from mass surveillance”.
They labeled Mr. Snowden an "International human rights
defender" and offered him asylum within the European borders.
This is an enormous ‘middle finger’ that Europe just gave the U.S.
Four years ago Europe would have followed blindly along with the U.S.’s
trumped-up charges, arrested and deported Mr. Snowden as a major criminal. Today, Europe said: “Mr. Snowden is defending
human rights, and is welcomed in the Eurozone.” This is huge.
Ms. Yellen, take this as fair warning – Europe (behind the scenes) is
applauding your initiative to raise interest rates. You are ‘single handedly’ increasing the
value of the U.S. dollar, limiting every U.S. company’s ability to compete
overseas, and dramatically increasing the probability of DEFLATION. Your interest rate hike could push the dollar
index to over 100, and that’s something we haven’t seen in over a decade.
I have seen the world overcome: Vietnam, the Cold War, the oil embargo,
wild inflation, and a host of other ills – but I have never seen today’s
disjointed madness:
-
Nation after nation is printing trillions of dollars
because the global finance machine is stuck in neutral.
-
The entire Middle East is on fire.
-
China has surpassed the U.S. in both manufacturing and
credit.
-
Russia has gone from being the ‘bad guy’ to the ‘good
guy’.
-
Europe is burning with rage at all of the refugee camps.
-
And 4 nations now employ negative interest rates.
Ms. Yellen, you have successfully allowed the largest economy in the
world – to become “a kite dancing in a Hurricane.” In the movie, James Bond saves the
world. In real life, I don’t see reality
imitating art any time soon.
The Market:
Factually:
- For every 1 job
created in the US this decade, U.S. corporations have spent $296,000 on stock
buybacks.
-
35% of ALL California millennials live with their
parents.
-
German production fell 1.7% last month.
-
Layoffs are currently running 13% higher than last year.
- Standard and Poor
cut Saudi Arabia's credit rating.
-
The Atlanta FED lowered its U.S. full year GDP estimate
to 1.9%.
-
The ISM Manufacturing Index tumbled to its weakest point
in 3 Years
- $6.3 trillion in
global government bonds currently yield less than 0%
- There have been 606
global rate cuts since the Lehman Bros. disaster.
- China's manufacturing
is down to 2008 levels, despite its $1 Trillion debt injection.
- Mario Draghi admits that
global QE has failed and that "The slowdown is probably not temporary”.
-
Bill Ackman's hedge fund will lose $2.5 Billion on their
VRX position. This will ripple through
the hedge fund community.
-
The FANG stocks (F = Facebook, A = Amazon, N = NetFlix,
and G = Google) have accounted for 20% of the stock market’s increase, and have
one thing in common – they all do NOT make anything.
The Non-Farm Payrolls report was released on Friday, and it showed us
creating 271k jobs in October, the unemployment rate dropping to 5%, and wages
rising by 2.5%. A better report you
could not have made up. However, when
you burrow into the report, the ‘ugly’ shines through.
-
First, the birth/death model accounted for 165k (61%)
jobs – that most likely don't exist.
-
Second, the over 55 year-old demographic absorbed
virtually ALL of the new jobs.
-
And third, the prime working age demographic (25 to 54) actually
LOST 119k jobs.
The FED has taken this report as a green light to raise interest rates. And TV’s ‘talking heads’ are trying to get me
to believe that the economy will boom as rates rise. So if mortgage
applications fell by 12% with zero interest rates, why won’t they fall even
further when mortgage rates rise? Don't get me wrong – interest rates
should NEVER be at zero (or below). That
is a massive distortion. What I am
saying is that the economy is now based upon zero interest rates, and any hike
(no matter how small) will have a negative effect in the short term.
The only other distortion-focused time (that I have seen) was the 1999 -
2000 Tech bubble. In many ways, this
time it’s worse. In 1999, interest rates
were normal, with the Fed funds rate being around 5.25%. In 1999, the FED had NOT printed $4 Trillion,
and done 4 layers of QE. And in 1999, employment
was good, and the labor market was tight. Currently, most of the really
smart money no longer trusts this stock market.
This week David Tepper explained that his funds are not doing so well
because they have been cautious. They
are far from being fully invested, and said: “Reality can be beaten back when
you have insane central planners propping the market up with money they print
out of thin air.” Right now the FED is
putting on a tremendous show – sucking in investor money. However both Doug Casey and Gerald Celente (market
prognosticators) have come out expecting crashes by the end of the year.
For example, on Friday (just as the market was rolling over) someone
placed 4 ‘monster’ S&P futures buys – 10 seconds apart – which saved the
index and the market(s). Based upon the
size of these purchases, the FED and the government’s Plunge Patrol Team (PPT)
were the ONLY possible buyers. In the
short term, fraud trumps market technicals.
So while the picture suggests that a much
lower market is coming, it really boils down to whether the FED will let it
happen.
I think we could see the
big averages like the DOW and the S&P take a pause this week, but it might
not be a true sell off. Watch the small
caps via the Russell (RUT) and the IWM. I
could see the market move out of large cap names and move into small caps –
using the fear of a December rate hike as their fuel. The rate hike fear has caused the dollar to
go ballistic, so it would make sense to turn to companies (such as the small
caps) that have domestic rather than international exposure. We certainly live in interesting times.
TIPS:
Watch the Small Cap stocks (shown by the Russell Index) this week. If the Russell (RUT) pulls back below 1180,
we could see a short-term sell-off in the other indices. The VIX (a volatility indicator) is holding
up well. While it is below the 15-level,
it is not at a level that shows broader based optimism. Perhaps it is holding up because there is
still concern about a December rate hike. We could be setting up for a
breakout Santa Claus rally, but so far the Russell and the VIX are not totally
buying into that.
INDU 17,910: Resistance will come in at 18,000 if we
open flat on Monday.
NDX 4,707: The tech heavy index
(despite its climb) has seen some huge volatility. Look at 4600 as low support, but I don’t like
the gap below that.
SPX 2,099: Closing
at 2100
will comfort the markets to start the week.
RUT 1,200: For me it is all
about the order flow in the Russell. The
index hasn’t shown great confidence in the equity markets since June, and while
we have come off the lows in October, we are still shy of seeing a breakout
rally.
After doing some earnings trades in Facebook and Disney, I remain very
light:
-
AG – BOUGHT Stock @ $3.58 / and Jan, 2018 $2 Calls @
$2.30
-
AUY – BOUGHT Stock @ $2.50 / and Jan, 2017 $2 Calls @
$0.90
-
EGO – BOUGHT Stock @ $4.00 / and Jan, 2017 $3.50 Calls @
$1.10
-
GFI – BOUGHT Stock @ $2.80 / and Jan, 2017 $2.50 Calls @
$0.90
-
IAG – BOUGHT Stock @ $2 / and Jan, 2017 $1.50 Calls @
$0.85
-
FFMGF – BOUGHT Stock @ $0.33
-
SPX:
o
SOLD – Iron Condor – Nov @ 1950 / 1955 to 2150 / 2155.
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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