RF's Financial News

Sunday, November 2, 2014

This Week in Barrons - 11-2-2014

This Week in Barrons – 11-2-2014:

“QE Infinity … and Beyond!” … Buzz Lightyear

Dear Ms. Yellen:

Ms. Yellen, congratulations on ending QE. As I remember the movie Toy Story, I wish you the best of luck making sure that our economy (like Buzz Lightyear) glides slowly in for a safe landing. But – say it ain’t so that:

- Alan Greenspan said: “QE did NOT help the economy, the un-wind will be painful”, and he recommended buying gold.

- Hillary Clinton said: “Don’t let anybody tell you that it’s corporations and businesses that create jobs.”

- Nancy Pelosi said: “Unemployment benefits are creating jobs faster than practically any other program.”

- Japan announced that they will (a) expand their QE program by 40%, and (b) the Bank of Japan will triple their purchases of Exchange Traded Funds. Unless I’m misunderstanding this, it means that they are directly buying into their own stock market.

- The European Central Bank (ECB) is going to announce their own QE program after their meeting on November 6^th.

- U.S. corporate earnings and economic data (GDP, housing, jobless claims and consumer) are coming in weaker than anticipated, and your FOMC statement was more ‘hawkish’ than normal.

- The 3.5% GDP number showed a weak consumer, and was only bolstered by the largest gain in defense spending since 2009.

- The barrier to higher real estate sales has nothing to do with home prices or mortgage rates, but rather with jobs and income. “We don’t have enough jobs, and the jobs we do have don’t pay enough; therefore, the result is the lowest level of home ownership in 19 years.”

- Your ‘hawkish’ tone and implied interest rate increases are just ‘talk’ – yes? Because increasing interest rates with the CPI (consumer price index) continuing to fall and the dollar continuing to rally is simply financial suicide for the U.S.

Ms. Yellen, again thanks for ending QE, and ‘Thank You’ in advance for a potentially great holiday season for the equity markets. But won’t it be difficult to grow our economy if our own currency continues to rally, disinflation begins to really take hold, and our labor market continues to have structural problems?

Finally, Ms. Yellen, there’s a rumor out there that you did NOT really end QE. The rumor-mill says that you currently have $4 Trillion worth of U.S. Treasuries and mortgages on your books. As those treasuries mature and pay the coupon and as those mortgages continue to pay – the FED will be making about $500 Billion dollars a year. The rumor mill says that you’re going to use this money as a small replacement for QE. Please, say it ain’t so!

The Market:

So for those looking for ‘actionable’ advice: Don't do a darned thing right now, because the crosscurrents are enormous.

- The FED just took away the punch bowl, but there are national elections next week.

- Economists are already debating whether the rate hikes will begin in the spring of 2015 or 2016.

- Consumer confidence is at an all time high (a level not seen since November of 2007), which is the very month the market started to roll over into its deepest drop in decades.

- U.S. durable goods declined in September – missing estimates by a mile.

- UBS set aside $2 Billion for illegal currency rigging and tax evasion settlements.

But ‘oh look’ we’re at all-time, new highs. According to JP Morgan, QE added $9 Trillion In ‘Equity Wealth’, which translates to 32% of the current S&P 500 level. QE not only distorts interest rates, but also distorts corporate earnings by allowing corporations to buy-back their own stock at sadly deflated rates. But the fact that we’re at all-time highs does NOT mean that we're clear of any danger zones and ‘full-speed’ ahead.

I understand that:

- November is generally a good month for stocks, especially the second half of November.

- Japan is going to be buying US stocks.

- The FED is not totally out of the QE game due to their reinvestment philosophy.

- Most companies do their buy-backs in November.

- The election is on Tuesday, and it appears as if the Republicans are going to rout the Democrats.

If the Republicans take control, we could hear all manner of things coming out of Congress – from a call to impeach Obama to noise over Illegals, to Obamacare. In other words, elections have consequences, and some of the things the Republicans might say, could rattle the market. So, I'm looking at these last few days of rally with a more than skeptical eye. This rally feels more like a ‘last dash’, ‘throw the kitchen sink’, desperation rally – than a healthy march forward. I need to see what kind of shape we're in by the end of the week.

For Monday, Tuesday and most of Wednesday I would expect to see more chop than trend – as everyone dissects the results of the election. But by Thursday and Friday we should get pretty serious hints as to the near term direction of the market. Frankly, I’m just not convinced that this blast higher is going to hold up. If the market is going to start another true leg higher, I will have time to get involved – otherwise, there is no reason to go ‘all in’ right now.

Watch the IWM, the XLF and the SMH this week. These three ETF's are very good indicators for where things are going to go. If they all hold up, then yes, we will be heading higher. But, if they get mixed or red – then you should exercise caution.

Tips:

QE Infinity … and Beyond! That is what we received last week – as Japan picked up (increased QE) where the U.S. FED left off (ending it’s QE). The Japanese QE gave the Nikkei a 5% boost higher, the European markets a 2% higher, and the U.S. markets another record all-time high.

However, there is a lot of crazy stuff going on in this market. The good new is – after you’ve been trading for a while – ‘everything old is new again.’ The biggest ‘curve ball’ that is going on in this market – is that the dollar index is exploding higher. This is laying the pattern for something that is MASSIVE – coming down the line. When a key asset (like the U.S. dollar) changes – the ripple effect touches everything. When money is flowing into the U.S. dollar, it means that it’s flowing out of emerging market economies. The challenge is (a) trying to balance out what is going to happen to the world over the next couple of years, and to (b) make sure that we can make money next week. First, anything that is correlated to U.S. dollar moving higher, and non-correlated assets will be moving lower – such as the Euro.

I think that the market is extended here and we should see some consolidation. One element to be aware of is an ECB meeting on NOV 6^th. If the ECB follows Japan with more QE, we will see more upside to our markets. My current list of ‘watch’ candidates includes: MMM, IBB, FDX, ALL, PII, HSY, FLR, BMY, DPS, TEX, SLW, IYT, TRV, UTX, XLE and TWTR (possibly to the upside).

1. The Euro is going lower; therefore, consider buying the March 2015 - $127 PUTS on FXE for $4.57 per contract.

2. Gold is going lower. GLD will move from $116 to under $100, and SLV will go down along with it. Consider buying December 2014 - $17 PUTS on SLV for approximately $1.69 per contract.

3. Consider purchasing December 2014 - $118 CALLS in TLT (bonds) for approximately $3.00.

4. Consider selling the SPX - December 2014 – Iron Condor – 1875 / 1880 – 2095 / 2100 – and buying a December 2160 call as protection – with a 1:3 risk/reward ratio.

5. Consider selling the RUT - December 2014 – Iron Condor – 1070 / 1080 – 1240 / 1250 – buying a December 1250 call as protection – with a 1:3 risk/reward ratio.

My current short-term ‘Larger-Cap’ holds are:

- KO (Beverage) – in @ $41.17 – (currently $41.87),

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, October 26, 2014

This Week in Barrons - 10-26-14

This Week in Barrons – 10-26-2014:

Politicians – they Walk Among us – and they Breed!

Maybe it’s because of Halloween Week, but politicians are really starting to scare me. Last week President Obama (in a campaign speech) said: “By almost every measure we are better off than the day I took office". At first I thought it was his attempt at humor, until I realized he believed what he said. Factually President Obama – from the time you took office until now:

- Individual savings rates have fallen by 17%, from 6.5% to 5.4%,

- The number of food stamp recipients has increased by 46%, from 31.9 M to 46.5 M,

- The number of part time workers has increased by 12%, from 25M to 28M,

- The median income of a U.S. worker has fallen by 3.3%, from $55,871 to $53.978 (not counting inflation),

- The number of people living in poverty has increased by 26% to 48M (an all-time high),

- The majority (60%) of the jobs lost since 2008 have been 'high paying' jobs (over $18/hr.), while the majority (58%) of the jobs created since 2008 have been 'low paying' jobs (less than $12/hr.),

- AND with QE3 creating 1M jobs, but costing the taxpayers $1T – that’s a cost of $1M PER JOB created! That’s an incredible statistic. If the average job created produced wages plus benefits of $16 per hour ($33,000 per year) – where did the other 96% of the $1M per job go? Does it mean that the remaining $967,000 per job ($1M per job minus the $33,000 worker’s wages) went into the pockets of banksters – who (in turn) invested it into the stock market?

Now, we can only blame ourselves for electing the ‘Walking Dead.’ In fact, JA sent me some sample Congressional interactions that (I’m ashamed to say) made me laugh at their level of incompetence:

- Bernie Sanders (a senior Vermont Congressman) recently complained about his trip to Orlando, Florida – because his room lacked an ‘ocean view’. When he was told that Orlando was in the middle of the state he exclaimed: “Don't lie to me! I looked it up on the map, and Florida is a very THIN state!"

- Lindsay Ross (an aid to John Kerry) inquired: “Would it be less expensive when going to Hawaii - to fly into California and then take the train to Hawaii?”

- Bobby Bright (a freshman Congressman from Alabama) wondered how to find his plane. “I know that the flight number is #823, but none of the planes seemed to have the flight numbers painted on them.”

- And then there was Mary Landrieu (a Senator from Louisiana), who was told that in order to fly to China she needed both a passport and a tourist visa. Ms. Landrieu was abrupt in her response: “I do NOT need a visa because the last four times I visited China – every shop I visited accepted American Express.”

When the President speaks of income inequality, someone needs to do the math for him on the above numbers. It appears that for every working-class dollar created, we are paying $29.3 in crony capitalism to all of his capitalist-investor-banker friends. History shows us that this pace is unsustainable without a correction of dramatic proportions. I urge you to make your voices heard – the first week of November.

The Market:

In the short term, there is a pattern of market manipulation developing, and it’s all being accomplished by jawboning. Early last week it was FED heads Williams and Bullard hinting at QE4, then the ECB's Coeure talked of going on an ‘ECB buying spree’, then China talking about a $30 billion targeted stimulus, and finally the Japanese finance minister hinting at a 25% stock rebalancing in their government pension fund. The amazing part is that the jawboning is working. Market volatility is at ‘un-heard-of’ levels, with wild mood-swings of a couple hundred points per day.

But let’s take a step back. One thought is that next week (when the FOMC ends the QE program) ‘air’ could start to leak out of this market. The elections are on November 4^th, so any of the ‘propping up’ that may have been done will be over by then. Combine this with the incredible earnings misses from some large multinationals (IBM, Coca-Cola and McDonalds), and the outright ‘doctoring’ of earnings due to stock buyback programs (Apple buying back $45B worth of it’s own stock) – and you have a confused investor favoring the market’s downside direction.

On the other hand, we've had the first 10% correction in over 3 years, and many feel that this was as deep a plunge as we're going to see. We also are coming into the months of November and December – that are typically good months for the market. In fact, November is notorious for being the month where companies do the bulk of their buy back action. And there are a ton of hedge funds that are woefully behind the market – that will try and ‘save face’ by piling-in and ‘making’ the market go higher as they ride along.

The strong U.S. dollar (that has delivered us lower oil prices) is weakening U.S. exports and hurting our corporation’s top-line revenue abilities. Due to dollar fluctuations, tax inequalities and other reasons, multinational corporations continue to migrate overseas – where the bulk of consumers are located and where consumer income is growing. The key overseas markets are Brazil, Russia, India and China (BRIC’s) – along with the emerging markets.

So there are reasons to think that this market will fall, and reasons to think that it will rise. However, without more FED injections of some kind, this market will start to ‘roll over’, and the recent increased volatility is evidence of that. But I do NOT think that this ‘roll over’ will happen between now and the end of the year. I think that we're going to be trapped between the lows of the 10% dip and the highs we have already set. I can see us running up and down inside that range until the year ends. But come the New Year, I do expect this market to begin its downtrend, and it could fall a long way.

Next week (on Tuesday and Wednesday) we have another Federal Open-Market Committee (FOMC) meeting. I believe that the Fed will maintain their dovish stance on interest rates – keeping them at zero out into the future. But I am on the fence as to whether they will take any action regarding QE4 – in order to weaken the dollar and create more inflation. In advance of the FOMC meeting, I would expect to see market consolidation along with the VIX (market volatility index) in the 15 to 17 range. The RUT (Russell 2000 Index of small-cap companies) along with the 10-year bonds are pricing-in a dovish FED meeting. I believe that the FED can sell more HOPE’ium with its zero interest rate policy alone. If the FED introduces more QE – then the volatility should be reduced, and the market will indeed move higher.

Between now and the end of year, this market will favor the nimble investor. You won’t be able to get too long or too short. If you’re the type of investor that wants to hold something for more than a week or two at a time – this won’t be a great market for you as the FED’s stars are beginning to align. The FED needs a stronger dollar and weaker CPI in order to justify more QE, and to keep interest rates at zero for a longer period of time. If the FED mentions deflationary concerns at the FOMC meeting, this will fuel rumors surrounding QE4. And with the weaker CPI (1.7%) and the FED’s concern about ‘slack in the labor market’ and ‘structural unemployment problems’, there is a possibility that they may NOT end QE3 just yet and let it play out a little while longer.

Personally, I’m reminded of a line from the movie ‘War Games’ where Joshua (a computer) says: “The only winning move is – NOT to play.” Right now I fear our market is stuck between the big correction and the all-time highs, and we will remain there until yearend.

Tips:

We have all heard the saying: “The market has no memory from day to day”, and that certainly applies to this market. Just a little over a week ago, the market was talking ‘doom and gloom’ and now it’s singing ‘Happy days are here again.’ The past week, the S&P had its best week in almost 2 years. This coming week has many major energy and oil companies reporting earnings, so I expect some downward pressure on the markets. I’m seeing potential trades in names such as: AAPL, IBB, FDX, COST, DPS, CME, CBOE, ICE, WYNN, TEX, SLW, IYT, TRV, UTX, HERO, XLE, UPL, PAA, KMI, VRTX, AMGN, and REGN.

Remember, over 75% of the time – the week before Halloween has an upward bias associated with it. I’ll be watching the RUT (the Russell-2000 Small-cap Index) as my ‘tell’ for this market.

In response to readers asking for more exact stock picks, I have constructed some recommendations below; however, you may want to pause until after the FOMC meeting – just in case there are any fireworks. Also please note, I continue to move from investing ‘directionally’ (which I find extremely difficult in this environment) – to investing in what I think will NOT happen. Below – you will see that I think WYNN, YELP will move lower (so I’m selling Call Credit Spreads), while believing that GMCR, NFLX, IBM, AMZN, and DECK will move higher (and therefore selling Put Credit Spreads.)

- Wynn Hotels (WYNN) – Sell the 202.5 / 205 Call Credit Spread with the momentum waves negative and the daily squeeze is waiting to fire short,

- Yelp (YELP) – Sell the 65 / 67 Call Credit Spread with the momentum waves negative and daily squeeze firing short,

- Green Mountain Coffee (GMCR) – Sell the 136 / 134 Put Credit Spread – with the theme of the week being upward and the momentum waves being positive,

- NetFlix (NFLX) – Sell the 362.5 / 357.5 Put Credit Spread as the ‘squeeze’ is causing a reversion to the mean,

- Deckers (DECK) – Sell the 77 / 75 Put Credit Spread with the theme of the week being upward but cautious due to the mixed momentum waves,

- IBM – Sell the 155 / 152.5 Put Credit Spread with the theme of the week being upward but cautious due to the negative momentum waves,

- Amazon (AMZN) – Sell the 265 / 260 Put Credit Spread with the theme of the week being upward but cautious due to the negative momentum waves,

- S&P Index (SPX) – Sell the 1920 / 1915 Put Credit Spread – with the theme of the week being positive, but wait until after Wednesday’s FOMC meeting for confirmation,

- Nasdaq (NDX) – Sell 3910 / 3905 Put Credit Spread – with the theme of the week being positive, but wait until after Wednesday’s FOMC meeting, and

- The Russell 2000 (RUT) – Sell the 1070 / 1060 Put Credit Spread – with the theme of the week being positive, but wait until after Wednesday’s FOMC