This
Week in Barrons – 9-7-2014
“We can’t
trust this number…” Mark Zandi (Moody’s Chief Economist) and Steve
Liesman (CNBC economics reporter)
Last Friday,
virtually every economist was predicting that our economy would create over
200,000 jobs for the 8th month in a row. Unfortunately for them, the number came in at
142,000 jobs created in the month of August. Both Mr. Liesman and Mr. Zandi (almost in
unison) said: “I don’t believe this number!
If you believe this number, you believe pigs fly! We can’t trust this number!” Honestly, Mr. Liesman and Mr. Zandi – is this
the FIRST time that you can’t believe the numbers that are coming out of our
government? Allow me to review a couple
other numbers – which potentially you won’t like:
-
I trust the 12% ‘real unemployment rate’ (U6 – that was used for
many years) – rather than the 6.1% (U3 rate) that the media is told. FYI: 31% of the unemployed have been without
work for over 6 months, and the labor participation rate reached it’s lowest
level since 1978 – 62.8%.
-
I trust that the typical family in 2014 makes $200 more a year,
than they did in 1989.
-
I trust that the U.S. is no longer leading the world in
consumption. China and India currently
out-consume us in computers, cars, and smart phones. It’s only a matter of time before they out
consume us in every single category.
-
I trust that the BRIC nations (Brazil, Russia, India and China)
have wage growth of over 10% per annum, with the U.S. being basically stagnant.
-
I trust that credit card growth in China is over 20% per annum,
with the U.S. being flat.
-
I trust that on Thursday of this week, the European Central Bank
(ECB) cut it’s deposit interest rates another 10 points. It will now COST you 0.2% to keep your money in a ECB bank. That's right, you have to PAY to put money in
any EBC regulated bank.
-
I trust that Mr. Draghi announced that the ECB would indeed
begin buying asset backed securities (mortgages). So despite the European Union's charter making it illegal for the EU to
do ‘QE’, they're going to go ahead and do it anyway by saying that it really isn't
QE.
In this day and age, it
seems to be all about the flow of ‘free money’ and forcing people to buy
stocks. But maybe it’s not just PEOPLE
buying stocks. For years I’ve been
saying that the world’s Central Banks are active participants in the markets. On many occasions I’ve watched our markets be
on the verge of ‘rolling over’ when – like magic – the ‘plunge patrol team’ would
come in and save the day with a Billion dollar futures order. Several months ago it was uncovered that
Central Banks had purchased an incredible $29 Trillion worth of stocks and
equity based assets. Now, for the first
time, Nanex’s Eric Hunsander has discovered that not only do the Central Banks
actively play in the stock market, but they also play in virtually every area
of trading from commodities to options to currencies. In fact, the CME has a Central Bank Incentive
Program – giving Central Banks price breaks on trading.
BINGO – the world’s Central
Bankers are actually market participants, and there’s an actual incentive
program for Central bankers to be even more involved. But unfortunately this simply opens the
ultimate can of worms to: What about the
laws of supply and demand? If you would
like to bid on a stock or a commodity, what happens when the person on the
other side of the trade is a Central Bank with unlimited, deep pockets? After all, Central Banks are institutions
that manage currency, the money supply, interest rates, and the commercial
banking system. Central Banks (the FED
in the U.S.) also possess a monopoly to PRINT a nation’s currency.
Don’t you think it’s unfair
at best (illegal at worst) that you could be trading opposite an entity that
can withstand infinite losses and can PRINT their way out of virtually any
trading position? This destroys any
connection whatsoever that the markets may have had to reality. How is a supply and demand balanced market
even possible if on one side resides a Central Bank (with an infinite supply of
money) for whom the entire notion of ‘losing money’ becomes completely
irrelevant?
I have said for about a
decade that I no longer care about fundamentals. Stocks do NOT go up any more because of sound
fundamentals. That boat has sailed. The
only thing that matters is what the market ‘elites’ want the stocks, commodities,
and currency markets to do. Stocks go up
(and often quickly down) because the Central Banks drive them there. For the past few years, the ‘market elites’ wanted
the stock market higher and now we have proof – NUMBERS we can TRUST. So Mr. Zandi and Mr. Liesman please do NOT
talk to me about ‘numbers you can trust’, but rather find me a trustworthy
‘market’.
The Market....
The market started this
holiday shortened week a bit sluggish, and with news of another terrorist beheading
of a journalist. The ISIS group does
have the power to move markets; because when they do these things, we know
there's going to be a retaliation and escalation of ‘boots on the ground’. We continued the week drifting sideways and
down. In fact, the S&P put in its
first 3-day losing streak in many weeks. Just about the time I thought everyone was
giving up – we got a horrible jobs report on Friday and news of a so-called
cease fire in the Ukraine – and ‘BOOM’ up we went.
So, are we in for another
leg higher? Given the data, I would have
to say no. After all, the U.S. Labor
Participation rate dropped to it’s lowest level since 1978. This stat alone shows how blatantly the
economy and the stock market have NOTHING in common. With the lowest labor participation rate in
35 years, the S&P’s made a new all-time high this week. This is NOT normal.
I understand that:
-
Our FED
is a major buyer of stocks.
-
Our FED
gets favorable pricing and ‘discounted rates’ in order to incentivize them to
buy even more.
-
The
percentage of analysts bullish on the market is hovering near record highs,
while ‘bears’ are almost non-existent.
-
The
‘set it and forget it’ mentality tells all of us that this upward movement
can’t stop. I assure you it can, and it
will. I just wish I could tell you when.
The hedge fund industry is
seriously lagging the market. Coming
into September, the entire industry is many percentage points below the gains
of the S&P. Why is that? Because a true ‘hedge’ fund, takes positions
that offset some value of risk. Since
the FED has created a market that only goes up, not being 100% long all the
time means that you're missing the boat – and underperforming the S&P.
Will all of the hedge
funds then throw caution to the wind and go ‘all in’ and be ‘extra long’ for
the remainder of the year? If they do,
that would push the market higher, even if the retail customer does nothing. However, it is times like these (with the
momentum monkey fully in charge) when the market often tosses everyone a
massive curve ball and drops like a rock. With these daily, low trading volumes –
producing a serious lack of liquidity, if everyone tries to bail out at the
same time it will feed on itself quickly.
I have heard nothing out
of the FED that would lead me to believe that Friday’s lousy jobs number will
stop them from ending QE in October. The
markets appear to be in denial of the FED stopping a liquidity program. I
think the FED will indeed stop QE, but will continue to keep rates low. I also think that after the next FED meeting,
people will wake up to the idea that part of the gravy train is running off the
tracks.
I’m currently leaning
long, but I'm not terribly comfortable about it. If we don't see some follow through on Monday,
I suggest we'll do a bit of fading again until they find some other reason to
jam us back up. If we do see a strong up-move
on Monday, then I'll count on the trading-bots to continue to drive us higher
during the week. Therefore, a show of
strength on Monday will be important to consider, so watch the levels – as it could
set the tone for the week. I also suspect
this week to be a bit more volatile and have more volume as everyone returns to
his or her trading desks. The returning
traders will be making decisions for September, a month not usually generous to
stock markets.
Tips:
In response to a question that I received
about ‘How I trade?’, I’ve listed below some of the guidelines that I follow
when trading stocks & options:
- I
constantly consult a stock’s chart in order to find the points of entry and
exit with the highest
probability of success.
- I believe that you CAN time the market. You can’t buy the EXACT low and sell the
EXACT high, but there are good and bad entry points.
- Learn to cut your losses quickly. “Re-entry is just a commission away.”
- Learn NOT to sell too soon – but rather hold
for the bigger move.
- Do NOT believe that diversifying your
portfolio will protect you.
- Do NOT believe that safety lies in covered
calls or dividend paying stocks.
- Do NOT buy or sell based upon emotion.
- Do NOT average DOWN your losers.
- Do NOT trade against the market trend. “The trend is your friend until it ends.”
When
picking Small Cap stocks – I look for:
- Companies
with a market cap
between $1B and $10B,
- Stocks priced under $60, but not a
deal killer if they aren’t,
- Stocks that are at or near 52 week
highs,
- Companies that are less than 5 years
old – they are generally in a faster growth phase than more well established companies,
and
-
Companies
that have high short interest are a bonus to find.
My energy (oil) stocks and selling 1+ standard deviation PCS’s (Put
Credit Spreads) and CCS’s (Call Credit Spreads) on the NDX and SPX became a
little more ‘exciting’ this week with the surprise, ECB rate cut. With the ECB rate cut, the U.S. dollar rose –
which immediately reduced the price of commodities. One of my favorite stocks – LNG – rebounded
nicely on Friday, but some other oil stocks will take into September to
rebound.
In terms of directional trades:
-
BOUGHT TLT (the Bond ETF) as it reached it’s 8
and then 21 day moving average – October $114 and $121 Calls,
-
SOLD NDX & SPX – PCS’s (Put Credit
Spreads) and CCS’s (Call Credit Spreads) – 2 SD (standard deviations) out &
will buy more during the week for weekly expiration,
-
SOLD EWZ – PCS’s and CCS’s / 1SD out / Sept.
monthly expiration,
-
SOLD AZO – $540 - 550 - 560 Butterfly / Sept.
monthly expiration,
-
SOLD DVN – PCS’s / 1 SD out / Sept. monthly
expiration,
-
SOLD IBB – CCS’s / 1 SD out / Sept. monthly
expiration,
-
BOUGHT MA – January, $86 Calls, and SELL
PCS’s (short term),
-
SOLD VIPS – PCS’s (Put Credit Spreads) and
BOUGHT Calls to take advantage of a one-day sell-off in the stock,
-
SOLD RUT and IWM – PCS’s (Put Credit Spreads)
– Sept. monthly expiration
My
current short-term holds are:
-
FEYE (Cyber-Sec) – in @ $28.76 – (currently
$31.72),
-
KO (Beverage) – in @ $41.17 – (currently $41.84),
-
LNG (Energy) – in @ $57.40 – (currently $83.35),
-
NUGT (Gold) – in @ $41.10 – (currently $37.64),
-
TLT (Bonds) – in @ 115.94 – (currently $115.73),
-
SIL (Silver) – in at 24.51 - (currently 12.75),
and
-
GLD (ETF for Gold) – in at 158.28, (currently
122.06)
My Small
Caps (earned 19.73% in the month of August):
-
ANAC – in @ $22.52 – (currently $21.92),
-
ANV (Miner) – in @ $3.78 – (currently $3.62),
-
FCEL (Energy) – in @ $2.52 – (currently
$2.60),
-
FET (Oil) – in @ $25.14 – (currently $32.83),
-
GTAT (Tech) – in @ $17.84 – (currently $16.99),
-
IDTI (Tech) – in @ $15.08 – (currently $16.94),
-
IG (Tech) – in @ $6.24 – (currently $6.86),
-
LEJU (Tech) – in @ $13.07 – (currently $17.09),
-
LNGLF (Energy) – in @ $3.54 – (currently
$3.69),
-
PEIX (Oil) – in @ $19.34 – (currently $22.83),
-
RFMD (Tech) – in @ $11.05 – (currently $12.31),
-
TSRA (Tech) – in @ $28.05 – (currently $29.68),
-
VDSI (Tech) – in @ $14.17 – (currently $16.40),
and
-
VTNR (Oil) – in @ $7.87 – (currently $8.86)
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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