RF's Financial News

Sunday, April 17, 2016

This Week in Barrons - 4-17-2016

This Week in Barrons – 4-17-2016:

Thoughts:

Ms. Yellen:

You held closed-door meetings with President Obama this past week, and I’m betting that he told you that your ONLY job was to continue to keep this stock market up. The ‘heck’ with doing the right thing (and beginning to normalize interest rates) your #1 job is to make sure that the stock market remains inflated because it’s the ONLY thing separating us from a crushing depression.

We both know that your Zero Interest Rate Policy (ZIRP) has stimulated corporate buy-backs, and that corporate buy-backs are the difference maker in keeping this market afloat. We also know that J.Q. Public sees the stock market as a reflection of the economy, and as long as it’s flirting with ‘all time highs’ he feels good enough to take on more debt. And the world runs on debt and credit. Every day banksters create ‘derivatives’ that they sell to other investors. These ‘Asset-Backed Securities’ (ABS) are bonds or notes backed by financial assets – typically consisting of receivables, auto loans, housing contracts and home-equity loans. As you can imagine, if the individual assets inside these bundled securities start to go south, then the assets themselves begin to implode. Think of it exactly like the mortgage debacle of ‘05 – ‘08.

Now if we both can agree that the real impetus behind the stock market's rise over the past few years has been corporate buy-backs ($430B in 2014 and $540B in 2015), then you need to concentrate on the CREDIT market and not on the stock market. Why? Because corporations are BORROWING the money to do the stock buy-backs from the credit market. For example:

- The XYZ company (with a $15 stock price) decides to borrow money from the credit markets at 6.5% - in order to buy-back their own stock.

- To borrow the money they use their sales ‘receivables’ as collateral.

- XYZ starts buying back their own stock, meanwhile the world begins to take notice.

- The world participates in the stock price increase, and drives the price to $30.

- Unfortunately, each quarter XYZ’s sales are falling, and they lay-off more and more workers just to make ends meet. That is to say, their business is dying yet the stock price is rising.

Now Ms. Yellen, it’s NOT the stock price increase that bothers me. What worries me is a company’s CASH ability to pay back the 6.5% INTEREST that they owe on the borrowed money – used to drive their stock price higher. See by using the monies to drive their stock price higher, they did NOT invest in R&D or in becoming more efficient.

But wait - it gets better. What about the investor that loaned XYZ the money? What happens to the Bank, Pension fund, Insurance fund, and/or Hedge fund when XYZ defaults on paying their 6.5% interest payment? Honestly, they’re going to take a big hit to their asset ledger and their credit market capabilities could be downgraded. This downgrade is solely due to XYZ’s inability to pay what they owe on the borrowed money.

So the reason to worry about a corporation’s declining revenues (sales) is not how the stock price will suffer (and it may), but rather how a corporation can re-pay their interest on their debt obligations given reduced revenues. A major corporate default could trigger an immediate debt downgrade, and then we would be looking at 2008 all over again.

So I believe that you can NOT get a ‘leg up’ on interest rates because an increase in interest rates (coupled with falling sales and earnings) would trigger a series of corporate interest payment defaults – from which the world could not recover. Therefore, if stocks can't hold a particular price, then some tangible amount of corporate debt will become non-performing. If enough of it does, we have contagion, and a repeat of 2008.

The Market:

As SF so aptly pointed out, notice the spike in business closures in February of 2016.

Align the above graphic – with a business’ needs for growth capital – with all of the financial lay-offs occurring around the globe – and you’ll begin to get the picture of a global downturn.

Factually:

- Alcoa kicked off earnings season this week by announcing a sales decline, profits that were down 90% (year-over-year), and 1,000 new employee layoffs with another 1,000 in the

works.

- Consumer confidence fell this week to sub 90 – a number not seen in years.

- Production capacity fell to 74.8%.

- Wells Fargo was fined $1.2B for selling toxic mortgages to investors.

- Goldman Sachs was fined $5B for similar mortgage shenanigans.

- Reuters confirmed that Deutsche Bank has agreed to settle U.S. litigation over allegations it illegally conspired with Bank of Nova Scotia and HSBC Holdings Plc to fix silver prices at the expense of investors. They also say they are going to disclose info on other big players that were a part of this same scheme.

- In total, our banksters have now paid over $200B in FINES for rigging markets, shafting investors, fixing rates, and laundering money.

If you've been watching gold and silver you're seeing something we haven't seen in a long time. After a blistering run higher in gold, silver and the miners, they did NOT roll back down. They traded sideways a bit, caught their breath and have started moving higher again. This is definitely different. In the last 5 years, they would pop higher, but then instantly roll right back down. I’m in a fair number of them, and have hesitated talking too much about them because (for years) it was so easy to get burned by buying false breakouts. However it looks like the tide has turned. Just about all of the miners have once again started higher. Please feel free to check out some charts on: NG, HL, KGC, SAND, AG, FSM, and DRD.

There is still an EPIC battle going on in the stock market. On one side you have: horrible sales, lower earnings, less shipping, a slowing China, lousy durable goods orders, and stagnant wages. On the other side you have the incessant desire to keep asset values up in order to keep trillions of dollars in derivative debt from imploding. Thus far, the various FED’s have kept things going. Can they keep all of these plates spinning long enough to come up with a plan B, which will be some form of monetary reset?

Let’s look at the big picture. On February 11th of 2016, the market was at 1820 on the S&P, and today we’re at 2080. On October 15^th of 2014 (a year and a half ago), the low of the day was 1820. So we could fall all the way back to 1820 (a 12% decline) and not break the lower range the market has been in for 2 years. With the market at 2080, we're still inside a major box between the high of 2135 and a low of 1820.

My guess is that this upcoming week will be a bit red. Yes it is earnings season and stocks will pop and drop like crazy over individual releases, but it is my thinking that we do a bit of fading. I am writing this AHEAD of the oil gathering at Doha, so things could change quickly. If you're not familiar, there's a big meeting of oil producing countries in Doha today – to see if they can agree on a production cap. If this meeting is viewed as a success, oil will spike and so will the markets on Monday. If it is a yawner, then I think that the market is going to do some backtracking.

As hard as it is to believe, until we get over 2135 or below 1820 we’re just in a large range of up and down chop. Not a bull market or a bear market – just a TRAPPED market. Try and buy the dips, and sell the rips. It's a lot of work, but the overall market has been running in place for 18 months. There's no solid trend, so you have to trade what they give you.

TIPS:

I am:

- Long various mining stocks: AG, AUY, DRD, EGO, FSM, GFI, IAG, KGC, and FFMGF,

- Long an oil supplier: REN @ $0.56,

- Long BA – Apr4 / May – Diagonal -133 / + 135 Call

- Long GLD – May – Call Debit Spread – 118 / 123,

- Sold LEN – May – Call Credit Spread – 48 / 50,

- Sold NDX – May – Iron Condor – 4125 / 4150 to 4750 / 4775,

- Sold RGR – May – Put Credit Spread – 55 / 60,

- Long RUT – May – Butterfly – 1000 / 1080 / 1130,

- Long POT – Stock & May – Put 16,

- Long TLT – May & June – Call Debit Spreads – 128 / 133,

- Sold TSLA – Apr – Iron Condor – 227.5 / 232.5 to 275 / 280,

- Long WYNN – Apr4 – Butterfly – 99 / 102 / 105 Call.

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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Sunday, April 10, 2016

This Week in Barrons - 4-10-2016

This Week in Barrons – 4-10-2016:

Thoughts:

If you listen closely … you can hear the 70’s a-comin’

Ms. Yellen:

This is one crazy, screwed up world that we live in. Sometimes you just need to change – to do what’s right. Money has become everything – which makes what Bruce Springsteen did last week that much more remarkable. Artists are the embodiment of their identity. When done correctly, artists channel their emotions, feelings, and insights directly to their listeners. Artists change hearts and minds, make a difference, and speak to us – all by putting the truth first. Bruce grew up in an era when musicians were giants. Heck, musicians (almost single-handedly) helped to stop an unjust war. Today's fans will have trouble digesting what Bruce did last week when he cancelled his tour date in North Carolina. He said: “As you also know, North Carolina has just passed HB2, the ‘bathroom’ law. HB2 dictates which bathrooms transgender people are permitted to use. Just as important, the law also attacks the rights of LGBT citizens to sue when their human rights are violated in the workplace. No other group of North Carolinians faces such a burden. In my mind, it’s an attempt by people who cannot stand the progress our country has made in recognizing the human rights of all of our citizens – to overturn that progress. I feel that it is time for the band and I to show solidarity for those freedom fighters. As a result (and with deepest apologies to our dedicated fans in Greensboro), we have canceled our show scheduled for Sunday, April 10th. Some things are more important than a rock show, and this fight against prejudice and bigotry — which is happening as I write — is one of them. It is the strongest means I have for raising my voice in opposition to those who continue to push us backwards instead of forwards.”

Last week I also listened to Elon Musk as he introduced his new (more affordable) TESLA automobile. Prior to announcing the vehicle itself (which produced the largest one-week launch of any product – ever), he stressed WHY to buy this car. (A) The internal combustion engine is continuing to spike our levels of CO2 ever higher. The last time our CO2 levels were this high was 11 million years ago – when man was just starting to walk. I’d rather not return to those times. (B) These same CO2 levels have resulted in 20-degree increases in our temperature extremes – resulting in unthinkable, environmental discontinuities if continued. And (C) a recent MIT study directly attributes 53,000 deaths per year to transportation emissions. So if you’re in favor of living over the alternative – then the decision is easy. Mr. Musk (in no small way) is raising his voice toward change – in order to do what’s right for our environment.

Finally in the ‘changing to do what’s right’ category, we learned this week that Brittany Stinson (a Delaware teen) was admitted to 5 Ivy-League colleges and Stanford – after penning an essay about Costco. Her 655-word ode to Costco was in response to a College Common Application admissions essay question that asked applicants to share something that was so important that their lives would feel “incomplete without it.” In the essay she talked of being: “A conquistador, but rather than searching the land for El Dorado, I scoured aisles for free samples.” She posed such questions as: “Was cultured yogurt any more well-mannered than its uncultured counterpart? Just as I sampled buffalo chicken dip or chocolate truffles, I probed the realms of history, dance and biology, all in pursuit of the ideal cart — one overflowing with theoretical situations and notions both silly and serious.” The line that I especially liked was: “With cart in hand, I do what scares me.”

Ms. Yellen, so few of us anymore ignore what makes us money, and do what scares us. Who will follow Bruce (the musician), Elon (the visionary), and Brittany (the conquistador)? Who will follow – potentially jeopardizing their career, losing money – all for what's right? It used to happen all the time. It must happen again. http://goo.gl/KZgvEH

The Market:

Factually:

- The Atlanta Fed now believes that GDP for 2016 will come in at 0.1% growth for the YEAR. That’s down from a 1.6% estimate in January.

- This week wholesale inventories fell 0.5%, and big truck orders plunged 37% to their lowest level since 2007.

- This week the Financial Times reported that the U.S. corporate default rate is at a 7 year high.

- On Wednesday, Gene Dodaro (an auditor for the Government Accountability Office) told lawmakers that in the next few years the federal government will OWE more money than our entire economy produces – and THAT is not sustainable.

- Additionally Gene found that in 2015 there was $136.7 Billion in improper payments made, which calls in question ALL governmental financial reporting.

We continue to see this divergence between reality and what's happening in the capital markets that are just a couple percent from all time highs. Our economy is troubled. Our trade deficits and our debts are through the roof. Our Government’s last hope is that keeping the stock market UP at all cost will keep J.Q. Public from revolting. In general, markets climb for years, and then fall like a rock in a short period of time. This market should have fallen two years ago, but the coordinated efforts by the FED, the ECB, and the Japanese Central bank – have kept all of the spinning plates in the air. They can't do this forever. Something’s going to break, but trying to call the exact date is a fool’s game.

Remember, a record $9 trillion USD has been pumped into the economy, and according to Goldman Sachs: “In each year since 2010, corporate demand via buybacks and M&A has represented the largest source of inflow to the U.S. equity market. We expect this pattern will repeat in 2016.” http://www.foxbusiness.com/features/2016/02/08/goldman-sachs-stock-buybacks-to-rescue-stock-market.html. That is to say, instead of investing in the company, expanding the business, funding R&D and purchasing new capital equipment – companies are pandering to their executive’s salaries and their Board of Directors. One doesn't have to be a rocket scientist to recognize the effect of massive stock repurchases on the market. Last week, during the blackout period (when companies were forbidden to re-purchase their own stock), the market had 3 consecutive down-days of record low liquidity. Some of the better known share buyback programs are: Gilead (GILD) - $12B, 3M (MMM) - $10B, GE (GE) - $26B, AIG (AIG) - $25B, and Apple (AAPL) - $35B.

The recently architected run-up from the February lows is nothing short of spectacular. But we're in a very interesting place. Hedge funds lost big in the first quarter. Bank of America says that investors are still fleeing the stock market in droves, and the only organizations propping up the market by buying ‘hand over fist’ are the ‘banksters’ themselves.

You’ve heard me compare this to a game of musical chairs. The problem is (at these levels) any day the music stops could be the day that the markets start a ‘major’ downward slide. It drives me crazy when major individual investors from Marc Faber to Jim Rogers scream to get out of stocks because something bad is coming. Yet each time we get a couple down days, our FED simply calls on their other central banking buddies to purchase even more stock than normal. It is terribly hard to bite your tongue and buy stocks when you know that they are rising for the WRONG reasons.

I predicted this week to be a pause to down week – and we got it. I am taking longer term ‘short-side’ positions, while in the short term trying to snag-n-grab profits from market bounces. The ‘Vegas Play’ I introduced in January is chugging along nicely, as the miners are still in an uptrend.

Should you be buying gold? Absolutely. Is buying silver still a good idea? Yes. All of the investors disillusioned by gold’s fall from 1900 to 1200, will be amazed at where gold ends up in the future. Gold and silver are assets where ‘timing the buy’ is everything. For example, if you bought gold between the years 2001 and 2006 (between $300 and $500) – you’re sitting pretty with gold currently at $1,240 / ounce. Timing is indeed everything, and I believe the time is right again.

However, be careful this week. I expect wicked pops-n-drops as earnings hits and misses start filing through. Try not to hold stocks over their reporting dates as the risk to reward is skewed to the downside.

TIPS:

S&P Index - On a pullback to the 2,000 level, watch to see how high it bounces. If it bounces over 2100, then the FED is in control and they are signaling a yearend rally. If the market does NOT bounce very high, then the market forces are in control and we are in store for much lower readings.

Russell Indx - The 1140 level will continue to act as resistance.

Nasdaq Indx - Unless we see a dramatic shift toward an up-trend, the broadening action displayed here is most often resolved to the downside.

Gold (GLD) - If we continue to hold 1,200 as support, we could rally fairly dramatically into the end of the year.

In terms of the upcoming earnings season (that starts on Tuesday) – if you’re an aggressive trader, think about buying out of the money, Delta 20 - Calls on some of the FANG stocks as they run into earnings. (Please sell BEFORE the actual earnings announcement as current risk/reward favors the downside.):

- GOOGL – Apr4 - $800 calls for $6.50,

- AMZN – Apr4 - $615 calls for $6,

- NFLX – Apr4 - $115 calls for $2.30, and

- FB – Apr5 - $118 calls for $2.

I am:

- Long various mining stocks: AG, AUY, DRD, EGO, FSM, GFI, IAG, KGC, and FFMGF,

- Long an oil supplier: REN @ $0.56,

- Sold CMG – Apr – Call Credit Spread – 470 / 472.5,

- Long GLD – Apr – Call Debit Spread – 118 / 123,

- Long IBM – Apr – Looking for a Pin @ $150,