This
Week in Barrons – 4-6-2014
Just Deal with It
Disaster is a word used to describe a multitude
of situations, such as airplane crashes, mudslides, hurricanes, mass shootings,
industrial accidents, and the list goes on. But what about an economic disaster? What if (for a few weeks/months) banks were
closed, credit cards didn’t work, ATM's were shut off, and there was no
‘normal’ way to purchase things – nationwide.
The good part of an economic disaster is you would still have your place
of residence. However, you still need to
decide (for advance) for yourself what level of preparedness you're willing to
do: water storage, home generator, propane grill, matches, flashlights,
candles, first aid kit, canned goods, etc.
Let’s imagine that we get a derivative cascade that ripples around the globe, so that banks are forced to shut down in order to stop hemorrhaging cash. With luck the government would force power and water companies to continue to provide; therefore, our biggest concern would be food. Do you at least have enough in home supplies to survive for 3 weeks of no grocery store? If not, that’s easily remedied with both canned and dry goods.
The reason for this rant is that history shows us: the people who have not prepared will seek out those who have, and try and take. Let’s assume (if this happens) that it will be a month or two until things return to normal. Unfortunately, (and this came as quite a shock to me) the first mistake people make is to allow others to know that they ‘have prepared’. Once word gets out that you ‘have prepared’, others will come to ‘take’. Therefore, your very first line of defense is to: ‘Act like Everyone else.’ You want to: look hungry, complain, and act nervous and scared.
So, Job #1 in protecting your home and your family in a serious multi-month disaster situation is to: Keep the Secret. You should interact with the neighbors as much as everyone else does, but make sure they understand that you're in the same boat as them. As long as you appear to be ‘like them’, you've decreased your chances of being a target by well over 50%.
The Market:
What a difference a day makes, and that day was Friday. The first half of last week the stock market roared higher – without a care in the world. The market gained over 250 DOW points, and CNBC was giddy with delight. But on Thursday, the market couldn't hold it, and ended the day unchanged from the day before.
Friday we received the latest Non-Farm Payroll Report. Estimates were for a creation of approximately 200,000 jobs, but there was quite a bit of buzz on Wall Street for job creation to exceed 250,000 and in some cases 300,000 jobs. The announced number was 192,000 jobs created. Inside the report, part-time workers accounted for 15% of the jobs created, and the Bureau of Labor and Statistic's Birth/Death model accounted for 40% (75,000) of the total 192,000 jobs. [FYI: The Birth/Death model attempts to guess at the number of small businesses started due to the large number of unemployed in the workforce; therefore, this number is basically ‘pure fiction.’]
OK, so the number was lousy. For a short while (on Friday) we popped higher. But, the euphoria didn’t last, and we began to fade. The real ‘fun’ started around 11 am, when the market started a marked and notable retreat, with real selling volume behind it. By 3 pm the market was down 177 DOW points, and over 110 on the NASDAQ. Those same 10am cheerleaders looked dumbfounded. The only reason for the sell off was Attorney General Eric Holder saying: “Due to Michael Lewis’s book on high frequency trading – the Justice Department would be looking into allegations of a rigged market.”
So if I believe the experts, the market sold off in ‘panic mode’ because ‘give guns to drug cartels’ Eric may investigate the stock market?
What a difference a day makes, and that day was Friday. The first half of last week the stock market roared higher – without a care in the world. The market gained over 250 DOW points, and CNBC was giddy with delight. But on Thursday, the market couldn't hold it, and ended the day unchanged from the day before.
Friday we received the latest Non-Farm Payroll Report. Estimates were for a creation of approximately 200,000 jobs, but there was quite a bit of buzz on Wall Street for job creation to exceed 250,000 and in some cases 300,000 jobs. The announced number was 192,000 jobs created. Inside the report, part-time workers accounted for 15% of the jobs created, and the Bureau of Labor and Statistic's Birth/Death model accounted for 40% (75,000) of the total 192,000 jobs. [FYI: The Birth/Death model attempts to guess at the number of small businesses started due to the large number of unemployed in the workforce; therefore, this number is basically ‘pure fiction.’]
OK, so the number was lousy. For a short while (on Friday) we popped higher. But, the euphoria didn’t last, and we began to fade. The real ‘fun’ started around 11 am, when the market started a marked and notable retreat, with real selling volume behind it. By 3 pm the market was down 177 DOW points, and over 110 on the NASDAQ. Those same 10am cheerleaders looked dumbfounded. The only reason for the sell off was Attorney General Eric Holder saying: “Due to Michael Lewis’s book on high frequency trading – the Justice Department would be looking into allegations of a rigged market.”
So if I believe the experts, the market sold off in ‘panic mode’ because ‘give guns to drug cartels’ Eric may investigate the stock market?
-
The same Eric Holder
that can’t seem to find a way to prosecute the financial ponzi schemes
propagated by our criminal banisters?
-
The same Eric Holder
that can’t see any issues with money laundering, and naked shorting of our
precious metals by our largest financial institutions?
-
And the same Eric
Holder that when asked said: “What corruption in the IRS?"
Personally, I'd rather
believe it was the market’s way of sending a message to Mr. Holder saying: “Don't
do anything crazy, otherwise you’ll get this sell off every day!”
The first thing I do when I see a selloff of this nature is to examine the correlated assets such as bonds, gold, oil and the yen. As of yet, none of those correlated assets have broken through any key levels of resistance/support such as the various moving averages. Therefore, at this moment, I’m viewing Friday as an exhausted ‘blow off top’ as the market continues to try to establish an all-time DOW closing high.
Mind you, that’s just a guess. In the past 5 years there have been dozens of reasons why this market should have reversed lower, and each one was met with increased buying and a continued grind higher. This year alone we’ve seen: the annexation of the Ukraine, huge slides in the Baltic Dry Index, lousy earnings, banks being slapped with billions in fines, and yet the market continues to push higher on the back of the Fed's printing press. It's hard for me to believe that it’s run has finally come to an end.
Heck, we still have an issue with QE. According to our own Fed, they are going to reduce QE to $0 by the fall of 2014. The purpose of QE is to purchase all of the remaining U.S. Treasuries that no one else wants in order to keep interest rates low. Well, after October, if the Fed won’t use QE to purchase the Treasuries, and other nations don’t want our Treasuries, who will purchase them – and keep our interest rates low? In the most recent Treasury auction, Belgium stepped up to buy all of the remaining Treasuries. Now, obviously our Fed is quietly shuffling money to countries like Belgium in order to complete our Treasury transactions. But, what other deals has our Fed made in order to maintain their level of ‘indirect’ QE involvement – while they’re reducing QE to $0?
The first thing I do when I see a selloff of this nature is to examine the correlated assets such as bonds, gold, oil and the yen. As of yet, none of those correlated assets have broken through any key levels of resistance/support such as the various moving averages. Therefore, at this moment, I’m viewing Friday as an exhausted ‘blow off top’ as the market continues to try to establish an all-time DOW closing high.
Mind you, that’s just a guess. In the past 5 years there have been dozens of reasons why this market should have reversed lower, and each one was met with increased buying and a continued grind higher. This year alone we’ve seen: the annexation of the Ukraine, huge slides in the Baltic Dry Index, lousy earnings, banks being slapped with billions in fines, and yet the market continues to push higher on the back of the Fed's printing press. It's hard for me to believe that it’s run has finally come to an end.
Heck, we still have an issue with QE. According to our own Fed, they are going to reduce QE to $0 by the fall of 2014. The purpose of QE is to purchase all of the remaining U.S. Treasuries that no one else wants in order to keep interest rates low. Well, after October, if the Fed won’t use QE to purchase the Treasuries, and other nations don’t want our Treasuries, who will purchase them – and keep our interest rates low? In the most recent Treasury auction, Belgium stepped up to buy all of the remaining Treasuries. Now, obviously our Fed is quietly shuffling money to countries like Belgium in order to complete our Treasury transactions. But, what other deals has our Fed made in order to maintain their level of ‘indirect’ QE involvement – while they’re reducing QE to $0?
There’s a major change in the wind. Russia and China are truly becoming BFF’s (best friends forever). Neither one of them particularly likes what the U.S. has done economically or militarily for the past 40 years. But the bottom line is this – we’re BROKE and we need to sell our Treasuries. Not only do we need to sell our Treasuries, but we need to borrow the funds just to pay the interest on the payments that we already owe. The money needs to come from somewhere, otherwise, our house of cards collapses.
I can’t find any data to support Friday being any more than a one-day selloff. For months, corporate ‘insiders’ have been selling their stock at an enormous pace. For the past two months, mutual funds have experienced significant outflows. Whenever you have corporations borrowing money to buy-back stock, and you find those same ‘insiders’ (that are doing the stock buy-backs) furiously selling their own inflated shares – this will NOT end well. ‘Insiders’ want out (with as much money as they can get). They are content leaving companies and their shareholders holding a bag of billions in debt. As to whether Friday was finally the start of a slow grind lower, we will know shortly.
Tips:
For all of you that were with us last week, and
bought into MannKind Pharmaceuticals – MNKD, (a diabetes drug company based
upon an insulin inhaling regimen) – Congratulations! On Tuesday evening (after the markets closed)
The FDA advance committee voted 13-1 on MNKD – Type 1 Diabetes approval, and
14-0 on MNKD – Type 2 Diabetes approval.
These approvals will need to be cemented by the FDA itself on April 15th
– so we’re not quite out of the woods yet.
But the stock went from $4 to approximately $9 overnight. Congrats to all of you on the double.
Now, if you’re still
in MNKD, or if you wish to purchase more shares – a ‘clever’ way to do that
could be the following:
-
To purchase more shares you could: ‘Sell-to-Open’ the current – May 2nd,
$6.50 – ‘Put contract’ for: $0.90. This
commits you to purchasing the stock on May 2nd at $6.50, but also
allows you to collect a $0.90 premium on each share. This then lowers your cost basis of each
share of stock by $0.90, from the current $6.85 to $5.95 per share. If you’re already interested in purchasing
shares of MNKD, this could represent an attractive alternative to paying today’s
$6.87 per share price. Also because the
$6.50 strike represents an approximate 5% discount to the current trading price
of the stock, there is a 63% possibility that the ‘Put contracts’ would expire
worthless. If they expire worthless, you
would pocket the entire $0.90 per share premium – a 13% monthly / a 157%
annualized return.
-
If you’re still in MNKD you could: ‘Sell-to-Open’ the current – May 2nd,
$7.00 – ‘Call contract’ for: $0.98/share.
If you have existing shares in MNKD at it’s current $6.87/share level,
then this ‘Covered Call’ would be committing you to sell the stock at $7.00 –
on May 2nd. But you would
also collect the additional $0.98 per share premium, driving your total return
to 18.61% if the stock gets called away on the May 2nd expiration
date. Considering that the $7.00 strike
represents a 2% premium to the stock’s current trading price, there is a 44%
chance that the covered call contract would expire worthless, in which case you
would keep both your shares of stock and the premium collected – producing a
monthly return of 14% - annualized to 171%.
My
current short-term holds are:
-
MNKD
– in @ $5.13 – currently ($6.87)
-
USO
(Oil) – in @ $34.51 - (currently $36.10),
-
UCO
(Oil) – in @ $28.75 – (currently $34.26),
-
TLT
(Bonds) – in @ $107.10 – (currently $108.51),
-
SIL (Silver) – in at 24.51 - (currently 12.89)
– no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
125.59) – no stop ($1,303 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 19.18)
– no stop ($20.00 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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