RF's Financial News

Saturday, November 16, 2013

This Week in Barrons - 11-17-2013

This Week in Barrons – 11-17-2013

A Fed Insider "Fesses-Up"

On Monday evening at 7pm, Andrew Huszar posted an op-ed piece for the Wall Street Journal (“Confessions of a Quantitative Easer”) that had everyone buzzing on Tuesday. Mr. Huszar was a Federal Reserve employee that left the Fed to work in the private sector. He left because (in his opinion) the Fed was becoming more and more beholden to Wall Street. But suddenly the Fed called him in early 2009, and asked him to come back. The reason? The Fed was launching the first waves of Quantitative Easing (QE), and needed someone to actually do the bond buying. Mr. Huszar’s job would be to buy up over a Trillion dollars worth of mortgage bonds in 12 months.

According to Mr. Huszar, the Fed was barreling headfirst into the largest financial stimulus in the history of the US. But, as his year of buying up mortgage bonds ended, he had come to the conclusion that while the banks were raking in unprecedented profits – Main Street was getting virtually none of the benefits. In one part of the op-ed, he apologized to the U.S. taxpayer, saying he helped Wall Street make billions, and did it with YOUR money. He went on to say that the program is a failure. It only serves its Wall Street masters, and the Fed is not the independent organization that they say they are.

The reason I found the article so important is that he lays out exactly the things I've been preaching about for so many years. The Federal Reserve has distorted the economy in ways that we've never seen before. They've boxed themselves into a very tight corner. If they continue to pump money into the system, it will continue to flow to the banksters. The banksters will push it into risk assets like stocks, and that creates the bubble that we’re seeing now. Only a very small portion (of the overall amount of money spent) will actually create any true economic activity.

If they try and remove this QE from the system, stocks will crash, and what little economic activity we have, will grind to a halt. We have the proof. Simply look at what happened to housing sales when rates spiked from 2 to 2.7%. Sales fell off a cliff. If The Ben Bernanke stops suppressing interest rates, and they potentially run to 4% - we implode not only the housing market, but also the U.S. economy.

Therefore, the U.S. has a dilemma. In saving the ‘Too Big to Fail’ banks, the Fed has printed over $3 Trillion dollars (out of thin air), and pushed it to these banksters. While the banksters are happy (and have all the money they need), the J. Q. Publics on Main Street continue to see their lifestyles erode. Currently, a record 91 million people are not in the workforce. And honestly, even if some of those 91 million are on disability or some other government program, they are not living the type of life they would have had if they had a good job with benefits.

I'm on record as saying that the Fed will NOT taper, and the next move may very well be MORE stimulus. Ms. Janet Yellen (the heir to The Ben Bernanke throne) thinks doing more is better than doing less. Ms. Yellen might just roll the dice and expand the amount of their QE process. More stimulus would send stocks soaring even higher, all the while barely moving the needle of true economic activity. You cannot fix a broken economy with monetary stimulus. That fix must be accomplished at the fundamental level.

To build an economy, you need to build an atmosphere of cooperation starting with the foundation. That means the elimination of ‘Over the Top’ regulations. One of the main reasons so many jobs fled to foreign countries was our excessive regulation. Before you can put a shovel in the ground to build a plant, you need to do 5 years of impact studies on the wooly moth (for example). While this is great for the wooly moth, it doesn't help the businessman who’s ready to build his plant, and put people back to work.

Unfortunately, it’s not an accident that we have so many layers of red tape, rules and regulations. Often politicians see businesses going under as a victory. They get to claim a reduced ‘carbon footprint’, and get to put those former employees onto Government programs. Therefore, we are stuck with financial engineering by the Fed as being the building block for our economy, and that is doomed to failure. The Fed either prints and increases the size of the stimulus programs, or takes the punchbowl away. Those are the only two choices. We continue to print, and watch a very small, select group benefit wildly, while the masses see no relief. Or we take the printing away, and as we try to adjust to something more ‘normal’ – the economy will lock-up and crash.

Andrew Huszar’s article was good, and proved our point. Yet even with his admission of the QE program being a failure, the QE program continues because they have no choice.

The Market...

Early in the week the ‘Taper Tantrum’ hit the market. The Fed was sending their henchmen out to play ‘good cop / bad cop’. A few would talk about QE remaining, while others spoke of tapering in December. They obviously did this to keep the market from just running straight up every single day. The FED has said on numerous occasions that any taper is data dependent. In other words, the data must be strong enough in order to reduce the amount of QE, so as to not affect the economy. Well:

- Housing sales fell 1.8% last month, with mortgage applications falling as well. Tapering will just cause interest rates to rise – so let’s assume that’s not a good thing for housing.

- Wal-Mart (the single largest retailer on the planet) said that things look lousy out there – and reported falling short of their revenue estimates by a Billion dollars.

- Cisco (CSCO) a very large tech company, not only missed their earnings and revenue projections but is calling for a 10% reduction in sales going forward – as markets are ‘very soft’. And when CSCO says that the technology markets of the world are lousy – they really mean it.

Then Ms. Janet Yellen took the stand for her confirmation hearing. The market went from ‘down’ to ‘up’ in a heartbeat. It appears that the new Fed head will (most likely) be even more ‘accommodative’ with money printing than The Ben Bernanke. If it weren’t so terribly sad, it would be funny. The market is only going up because of QE, and Ms. Yellen won't stop it.

We’re currently putting together a string of all-time highs. It is becoming fairly routine. But as long as the printing presses keep running, they'll keep jamming that money into the stock market. Why not? It's free money. Therefore, I continue to lean long and ‘hold my nose’. Yes, it stinks but the market is up and I’ll take it.

Tips:

Well, the secret is out of the bag. I feel vindicated and violated by CNBC’s Fast Money / Fast Options show on Friday evening. While they were discussing Twitter (TWTR) – one of the traders suggested that the ONLY way to play this stock (and many stocks at these levels) was to buy the stock, and then purchase the corresponding ‘at the money’ call option. In the case of Twitter – he pointed out that with the stock selling at: $43.98 – buying the $44 call option guarantees you $1.25 cents per WEEK. This is a 3% return for the WEEK. So, it appears that the proverbial ‘cat is out of the bag’. Let’s see how Monday’s ‘covered call’ action plays out.

Looking around I still like:

- WLT and ACI – especially with their corresponding ‘covered call’ options,

- The 3D printer space is going crazy – so stocks like SSYS / DDD / PRLB / XONE are all worth a 2^nd look.

- CSIQ and XONE both had non-spectacular earnings this week – and both moved higher on the news (go figure).

- I still like GILD in healthcare, BTU (Peabody Energy) and POT (Potash).

- AND – I like Twitter (TWRT) – but ONLY with the covered calls paying almost 3% per week!

My current short-term holds are:

- TGT in at 66.20 (currently 66.97) – stop at entry,

- TSO in at 50.56 (currently 54.71) – stop at 54.40,

- MOS in at 47.54 (currently 49.05) – stop at 48.50,

- CLF – in at 25.53 (currently 27.75) – stop at 26.50

- SIL – in at 24.51 (currently 12.28) – no stop

- GLD (ETF for Gold) – in at 158.28, (currently 124.48) – no stop ($1,287.30 per physical ounce), AND

- SLV (ETF for Silver) – in at 28.3 (currently 20.05) – no stop ($20.71 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.

Please be safe out there!

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Sunday, November 10, 2013

This Week in Barrons - 11-10-2013

This Week in Barrons – 11-10-2013

“If you like your current insurance…” … OOPS – I’m sorry!

After learning this week that (thanks to the Affordable Care Act) my own health insurance premiums will increase 47% next year, I decided to do a little digging. [Thanks to JT for his timely assistance.] The Affordable Care Act (ACA) is the single most contentious political action of my lifetime – outside of the Vietnam War. It touches everyone in one-way or another, and often in profoundly personal ways. Factually we were told:

- If you liked your insurance you could keep your insurance – that’s NOT true.

- If you liked your doctor you could keep your doctor – that’s NOT true.

- Existing insurance cannot be cancelled – that’s NOT true.

- We will make your insurance less expensive – that’s NOT true.

- Your health information and data will be secure – that’s NOT true.

- But what IS true is that due to all of the chaos, insurance companies are increasing their premiums.

The Manhattan Institute (this week) released a report that shows that insurance premiums, across 49 states, are increasing (on average) by 41%. Obamacare insurance rates for younger men are increasing by 97%, and for younger women by over 55%. The worst state is North Carolina, where some individual market rates have tripled for women, and quadrupled for men. The rest of the world has to be looking on and saying: “USA – why are you managing this transition so badly?”

A. We are forcing people to buy into a virtual marketplace, that (for all intense and purposes) is a monopoly. In theory, the ACA should have improved competition through their ‘Health Exchanges.’ Unfortunately, of the 2,500 counties served by the federal exchanges – 58% have less than 2 insurance carriers participating. Therefore, in over half the US, we are being FORCED to buy insurance from private companies that have pricing power, market dominance, and are exempt from anti-trust supervision.

B. Hospitals are also exempt from fair pricing laws. If you go to a hospital, you'll get a different price (for the same set of services) depending on whether you're uninsured, on Medicaid, or have an insurance policy. Because antitrust policy has been so inadequate for so long in the health sector, the lack of competition on the insurance side – is only magnified by the lack of competition on the hospital, pharmacy, and medical device sides. For example: in the past 6 years, more than 250 corporate mergers have reduced healthcare competition, allowing the remaining firms to charge higher fees, and increasing subsequent insurance premiums by over 87%. This has (however) produced a 428% profit increase within the insurance industry.

C. The US spends far more than any other country on healthcare (almost twice the global average) – but does NOT achieve any better healthcare outcomes. Chile, Hong Kong, and Singapore spend one fourth what we do, and achieve better outcomes and longer lifespans. Therefore, spending more money isn't the answer.

D. Most of our healthcare costs are incurred in the last twelve months of our lives. Modern medicine delays natural death, better than it extends a healthy life. Doctors understand what medicine can (and can’t) do, and therefore consume less healthcare than the average person. An ‘Advanced Directive’ (a document that specifies what steps should and should not be taken to save their lives should they become incapacitated) has been signed by over 64% of doctors and less than 20% of J. Q. Public. The gap is one of perception. Let’s use CPR as an example. CPR (that we’ve all seen on TV) was found to be successful in 75% of the cases, and 67% of those patients go home. However, more recent studies show that only 8% of those patients survive for more than one month, and of those – only 3% lead a normal life.

E. 5% of patients create over 60% of healthcare costs. A recent study asked if we spend more money – would we create a better quality of death? The conclusion was exactly the opposite: the LESS money spent during this time period produced a BETTER death experience. It seems that no matter how much money you spend during that last year, the effort makes things worse. A lot of the money is being spent to allow the patient to endure more bad experiences on a daily basis. The patient’s quality of life is being decreased; all the while we’re increasing the cost of death. We will all die. Until we have the conversation about how we die, and recognize that we spend too much on medicine we don't need, we won't reduce our costs.

I always wondered how a fragmented country and government could produce a unified healthcare plan. The answer is – it can’t. So we’ll all just need to wait for Round 2 of Obamacare.

The Market:

What a week. We saw the European banking community (in a bizarre move) reduce interest rates by one quarter of a percent. This surprised virtually everyone, including those in Europe. But understand, the PIIGS nations (that crashed so hard years ago) aren't ‘fixed’ – they’re just papered over. For example: nothing has changed in Cyprus since it’s bailout, and Spain still has it’s 45% youth unemployment. We stand witness to the Eurozone Central bankers realizing that if they stop pushing money into the system – the system will fall apart.

The market reaction to the move was interesting. After a big pop on Thursday morning, our market actually rolled over and lost 150 DOW points. Maybe (just for a few moments) everyone realized that destroying your currency, devaluing your money, and artificially stimulating your economy isn't such a hot idea after all?

Then on Friday we received the monthly jobs report. The estimates were for a gain of 120K jobs. The report came out and told us we actually added 204,000 jobs in the month of October. Honestly, with the ‘Taper’ in September, and despite the Government ‘Shutdown’ in October, you’re asking me to believe that we added twice as many jobs as were estimated? And during this same time period (while all of these glorious jobs were being created) the labor force participation rate FELL to 62.8% - the lowest number since March 1978. So we’re adding jobs (twice as many as expected), but the number of people employed is decreasing – to the lowest percentage in 40 years. HUH? How is that possible?

The market reaction to the number was very telling. The minute the number hit the DOW fell almost 100 points. Why? Because if the number were true, we would be experiencing growth, and then the Fed would be forced to taper it’s QE. The market knows that the only reason it is as high as it is, is because of QE. The market also knows that whatever economic activity we are seeing, is solely because of QE. Take away QE, and things fall. So we are solidly in that area where good news is bad for the market, and bad news is great for the market.

But then something very different happened – the market turned around and surged higher. Why? It took the market a while to realize that the jobs number was as phony as Obama telling you: “You can keep your current insurance.” Factually:

- The birth/death model added 120K (of the 204k) jobs, and those jobs don’t really exist – they’re just a calculation.

- The total number of people NOT in the labor force ROSE from 88.2M a year ago, to currently 91.5M. If we were producing jobs – this number would be going down, not up.

- And the employment (to population) ratio is down to 58.3% - from 58.6% in September and 58.7% a year ago. Again, if we were producing jobs – the employment ratio would be moving up, not down.

So, the market figured out that the Government is just trying to make it look like we're not in a depression, and these ‘fake’ numbers are not going to sway the Fed. Whew. What a week. After being beaten down on Thursday by 150 points, the market gained it all back on Friday. Hope (as they say) springs eternal.

I tend to spend a lot of time watching this market ‘digest’ it’s moves. Lately the market has been running in place, working itself sideways, and NOT pulling back with any real conviction. Usually these types of sideways moves mean that the market still has energy in it to move higher. For example: on October 29^th the market (the S&P’s) opened strong, inched higher and hit 1,772. Eight days later (which was last Friday) we ended the day at 1,770 on the S&P. That’s a virtually perfect sideways chart. Naturally within those 8 days we wiggled, bounced and jiggled around, but the basic movement is sideways – not down.

When I examine the XLF (the Exchange Traded Fund (ETF) that covers the financial sector), I’m seeing that it’s MACD indicator is curving upward. It is only about 14 cents away from challenging it’s all time high. The XLF is the leadership that the market needs to accompany any ‘real rally.’

Therefore, between the sideways action of the market, and the performance of the XLF, one can only assume that there are more gains in store for this already wildly overpriced market. Is that crazy? Absolutely, but insanity has ruled this market for the last few years. Unfortunately, one day we're going to pay for this with a major market crash, but until then, try and reap what you can.

The "trigger" (so to speak) is the S&P. If it gets over the few intra-day highs set at about 1,775, then it should be free and clear to soar into the blue. Over this next week we should see the market levitate to that area, struggle a bit, and then push past it.

Tips:

Looking around I still like:

- WLT and ACI – both coal producers – both with very handsome option abilities right now.

- The 3D printer space … SSYS / DDD / PRLB / XONE all worth a look.

- CSIQ in the solar market – but it’s not for the faint of heart,

- And more basics such as GILD, BTU (Peabody Energy) and POT (Potash).

- Look at POT > 33, IBM > 181.50, and MOS > 47.50.