This
Week in Barrons – 3-9-2014
Ukraine is giving me the Jitters:
While watching a certain financial
TV channel, I often need to smile – because it seems that guests are absolute
experts in virtually any topic that gets thrown at them – including the
following graph. It’s a scary parallel
isn’t it? It’s no longer a question of
‘IF’ history repeats itself.
However, this week’s topic is the
Ukraine. I listened intently to reporters,
analysts, and CEO’s tell me about Russia, Putin, the Ukraine, Ukrainian economics,
military strategy and a host of other topics.
I always ask myself: What makes these people think they are
experts? And I wonder how much of this
is pure propaganda?
I am not an expert on the Ukraine,
but I do know that virtually every student from the age of 7 onward can tell
you about the "Nazi Holocaust".
Yet virtually all of those same students have NO idea that Russia (during
the winter of 1932-33) starved and killed over 10 million Ukrainians (on
Ukrainian soil), and that Stalin killed over 30 million more throughout Russia.
It stands as the single largest human
holocaust of all time.
I wonder if those reporters,
analysts, and CEO’s:
-
Understand
the behind-the-scenes maneuvering that our State Department official (Victoria
Nuland) was doing with our U.S. Ambassador to the Ukraine, (Geoffrey Pyatt) to
try and get ‘our guy’ into the Ukrainian seat of power?
-
Know that
WE (the U.S.) provoked the rebellion, and attempted to install our own ‘puppet
government’.
-
Realize
that new revelations suggest that the people killed by ‘Government snipers’
were actually killed by the protestors with the goal of blaming it on the
former Ukrainian government to create more international support.
-
And
comprehend that we are doing our best to label Putin the monster
The Ukrainian fiasco reminds me very
much of the Cuban missile crisis of my youth. After the U.S. had placed nuclear missiles aimed
at Moscow in Turkey and Italy, and after the U.S. failed to overthrow the Cuban
regime, in May of 1962 – Nikita Khrushchev proposed the idea of placing Soviet
nuclear missiles in Cuba to deter any future invasion attempts. During a meeting between Khrushchev and Fidel
Castro in July, a secret agreement was reached and construction of several
missile sites begun. The U.S. considered
attacking Cuba via air and sea, but decided on a military blockade (a ‘quarantine’) for legal purposes. Under the ‘quarantine’ the U.S. would not
permit offensive weapons to be delivered to Cuba, while demanding the
dismantlement and return of Soviet weapons back to the USSR.
The Kennedy administration held only
a slim hope that the Kremlin would agree to their demands, and expected a
military confrontation. These fears were
underpinned by the October 24, 1962 letter by Soviet Premier Nikita Khrushchev
to President John F. Kennedy, in which he stated that the U.S. blockade of
"navigation in international waters and air space" constituted
"an act of aggression propelling human kind into the abyss of a world
nuclear-missile war". However, in
secret back channel communications the President and Premier initiated a
proposal to resolve the crisis.
You see, the Russians were going to
build a missile deployment center in Cuba and our Government was not going to
allow such a thing just 90 miles from our coast. Sound familiar? When the U.S. provoked the uprising in the
Ukraine that overthrew the standing Ukrainian Government, it confronted Russia
with two major problems:
-
(1) If
the Ukraine were to go ‘Pro EU/US’, there would be a real possibility of some
form of NATO military outposts being placed very close to Russia's border. That would virtually copy Russian missiles being
placed in Cuba.
-
(2) Crimea
(a portion of the Ukraine) is home to Russia's Black Sea Fleet. The Russian military took up residence in
Crimea more than 200 years ago, when Catherine the Great built a naval base at
Sevastopol. After the dissolution of the
Soviet Union in 1991, Russia and Ukraine tussled repeatedly over dividing up
the Black Sea Fleet based there, but never came to an agreement. Today, Russia rents its Sevastopol base from
Ukraine, and will never let that base be shut down or overtaken.
Why is it that we (the U.S.) help to
start these kinds of uprising over and over again, and then attempt to blame someone
else when it goes to ‘heck in a hand-basket’? If the Ukrainian people want to abandon
Russian authority and/or rule, then they should have honest elections, and let
the people decide. Instead we help stir
up violent protests with people being shot, beaten and burned, only to have
Russia come in and protect its interests, and then we attempt to blame Russia.
The one real ‘sticking’ point in all
of this is the existence of a bilateral agreement (signed in 1994) between the
U.S., Britain and the Ukraine where we all vowed to come to the defense of the
Ukraine if their borders were ever attacked. Therefore, in truly technical terms, a military
action in the Ukraine by Russia ‘demands’ that we respond militarily. So, what we are seeing play out is either
stupidity or insanity, because a military war with Russia cannot be won.
And finally, as China and Russia become
increasingly friendlier, together they own 28% of our (U.S.) outstanding
debt. Any agreement between them to start
‘dumping’ U.S. debt on the markets would grind us to a halt in hours. Yes, it would hurt them too, but one day they
will own all the gold they will need to survive the ‘paper dollar’ beating that
they would take by ‘dumping’ Treasuries and it will be ‘lights out’ for us. They realize that they hold the ultimate
trump card. In response to President
Obama's suggestion for Russia to back down (otherwise sanctions could be
imposed) the Russian presidential advisor, Sergei Glazyev said: “Authorities should dump U.S. Government bonds
in the event of Russian companies and individuals being targeted by sanctions
over events in Ukraine. We hold a decent
amount of treasury bonds (more than $200 billion), and if the United States
dares to freeze accounts of Russian businesses and citizens, we can no longer
view America as a reliable partner, and we will encourage everybody to dump U.S.
Treasury bonds, get rid of dollars as an unreliable currency, and leave the U.S.
market." He went on to
suggest that: “if U.S. sanctions are
imposed, then Russian companies would not repay the debts that they owe U.S.
banks." Now Russia's $200 Billion
wouldn't completely cripple our treasury markets, but add in some of China's $800
Billion and we are suddenly in a ‘world of hurt.’
This Friday is setting up as a ‘drop
dead’ day, as that is the date of the vote by the Crimean citizens to secede
from the Ukraine, and to presumably become a part of Russia. The majority of citizens in Crimea are
pro-Russian so this could trigger all kinds of fireworks, as we get closer to
the end of the week. Things would have
to get pretty stupid for us to actually have a military response and
escalation. That said, you just witnessed how close and how easily this
could escalate, and it would have NO winners. Stay safe out there.
The Market:
On Friday we received
the non-farm jobs report. Thus far every
bad economic report has been blamed on the weather. The jobs report was estimated to be 139k of
new hires, and it came in (better than estimates) at 175k. Which raises the question how could hiring be
so robust (in this bad weather), if we couldn’t sell goods and services? [Factually – 124k of those 175k jobs (71%)
were ‘made up / fake’ jobs – contributed by the ‘Birth/Death’ model.] I realize that I’m being a bit cynical here,
but please – ‘the spin’ is just so ‘in your face’ concerning the economy that
you have to poke fun at it. If a company
misses earnings, sales forecasts, etc. – it’s blamed on the weather. But a better than expected jobs report and
suddenly it’s the ‘recovery taking hold.’
Oh – and on Friday right after the jobs report – The Gap (retail stores)
reported that their same store sales fell 7%, and they blamed the weather. But Footlocker (shoe stores) reported a sales
increase of 3%. I guess it doesn’t snow
on shoe stores?
SF and I discussed over the weekend
the most recent CBO (Congressional Budget Office’s) report concerning the TARP
Program. Congress
authorized a $700 Billion rescue in October 2008. TARP (which spent more than $400 Billion to
stabilize banks such as Citigroup and Morgan Stanley, and companies including
American International Group and General Motors) will ultimately cost the
taxpayers $21 Billion. It will not be a
‘profitable’ venture as some reports have previously suggested.
Educationally, this week there was a
decision to re-do the SAT tests for getting into college. While the ‘company line’ is that the re-do
will open more doors for more people, and allow more people the opportunity to
get a chance to get into college. What
the re-do really does is lower the bar for admission. Factually:
-
(1)
Over half of our current high school graduates wouldn’t have made it past the 9th
grade 50 years ago,
-
(2) Colleges
need the $20 to $40k per year per student they will get from people who go into
debt putting their children through college, and
-
(3) We
can't have college enrollments fall due to people not being able to pass the
admission tests!
As the market flirts with all-time
highs, and I see the reality of what America has become, I continue to shake my
head. If I ever thought that the 1998 -
2000 ‘Internet’ market run was based on false hope, which clearly was just the
warm-up pitcher for this market’s performance. The correlated assets continue to diverge but
the markets continue to plow ahead.
However, the market head winds this
week will be the Ukraine. The vast
majority of what I read describes Putin as needing to expand his empire, but
honestly Putin did what any ‘good’ leader of his country would do – he
immediately secured the safety of the borders for his country. That meant securing Crimea. Does Putin want the remainder of the Ukraine
as many are suggesting? While there's potentially
some nostalgia running through Putin’s veins for that territory and millions of
Russians (loyal citizens) living there, I think he’s content having a satellite
buffer with mixed loyalties.
I have to assume that there will be
NO military action – unless stupid people do insane things. But the smokescreen out of the Obama administration
concerning inflicting damaging sanctions is just that. The rest of the world is indeed tired of
being controlled by Washington, and has been developing countermeasures to
prevent Washington from shutting them down economically. They've devised computer viruses that can
disrupt our markets, and our banking systems. They've created channels where
they could ‘dump’ our Treasuries and refuse payments on obligations. In other words, the U.S. could impose
sanctions on Russia, and Russia would come right back with it’s own brand of economic
warfare. The result would be that both
sides would be wounded. I’m guessing we
see more huff and puff, but in the end, the real outcome will be a stand down,
and a ‘sweep under the rug’. But beware
of the posturing to come.
The market is still striving for the
last all time high to be exceeded, and (depending upon the Ukraine) the DOW
should be on track to do that early this week.
We are in a bubble and there’s no telling how far this bubble will
inflate. All we can do now is continue
the ride – making sure to jump off before the wheels come off. Be cautious – and aware of the parallels
between our current market and the stock market crash of 1928-29 illustrated
below. Could history repeat itself? In my view – it already has.
Tips:
This week I exited QIHU before earnings for
spectacular profits. And we got back
into playing the NUGT / DUST combination.
These are two leveraged ETF’s that are focused around the gold and
silver mining industry. The ETF’s are
designed to virtually off-set each other – meaning as one goes up the other
goes down virtually the same amount.
Therefore, it’s somewhat of a natural to:
-
Purchase equal
dollar amounts of each ETF,
-
Sell – close to the
money calls on each ETF at a very accommodative return rate, and
-
Watch the calls
expire worthless – pocketing their complete sale amount.
FireEye (FEYE) issued more stock which brought their
stock price down and gave us yet another buying opportunity, along with a
directional call play. This coming week
I’ll be enhancing my position on TLT (the bond ETF) and a couple oil ETF’s –
UCO and USO in anticipation of the Ukrainian dilemma.
My
current short-term holds are:
-
FEYE – in @ $75.50 – (currently $81.63)
-
USO
(Oil) – in @ $34.51 - (currently $37.06)
-
UCO
(Oil) – in @ $28.75 – (currently $35.05)
-
SIL (Silver) – in at 24.51 - (currently 14.05)
– no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
129.29) – no stop ($1,339 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 20.20)
– no stop ($20.90 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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