RF's Financial News

Sunday, December 7, 2014

This Week in Barrons - 12-7-2014

This Week in Barrons – 12-7-2014:

Thoughts:

Dear Ms. Yellen:

Does it bother you that China is now the #1 largest economy in the world? I thought I would never see the day when the U.S. became the SECOND largest economy – but alas, that day has come. China became the world's largest economy this week, and the U.S. (just like Avis) is #2, and will have to Try Harder to regain the top spot. The International Monetary Fund (IMF) says that China’s economy is now worth $17.16 Trillion while the U.S. is worth only $16.85 T. They go on to say that by 2019, the Chinese economy will grow to $26T, while the U.S. will only grow to $21.5T – making the Chinese economy 20% larger than the U.S. over the next 5 years. China is expected to grow by approximately 7.5% this year and next, which is over twice as fast as even the most ambitious expectations for the U.S. economy. Economists around the world are describing this event as a ‘symbolic moment’ for the global economy. I was wondering whether you have any thoughts on how we could ‘Try Harder’ and move back into the #1 position?

In regards to China, President Obama is going to have to: ‘Try Harder’. The goals of President Obama’s most recent trip to China were to put more pressure on China against Russia, and to secure better Chinese relations. Instead of achieving these goals, President Obama found out that China:

- A. Asked Putin to arrive a day BEFORE Obama,

- B. Signed a lengthy energy and trade deal with Russia, and

- C. Forced President Obama to do photo ops with Putin.

Secondly, Ms. Yellen, I’m confused about the jobs numbers that came out this week. Early in the week, the ADP private payroll report disappointed – as it showed only 208,000 jobs being created (5.5% below expectations). According to the ADP report, services were the largest job creator at 176,000 jobs (85% of the total), but were down from the previous month’s 187,000. The ADP report also showed this November 2014 as being the worst in 4 years. The ADP report made sense to me given initial holiday sales data from both Black Friday and Cyber Monday came out weaker than initially expected. Then on Friday the Bureau of Labor Statistics (BLS) reported a massive job surge in November of 321,000 new jobs – almost 100,000 more than economists expected and the polar opposite of the trend that the ADP private payrolls report showed. The BLS report stated: (a) 77,000 of the total jobs (24%) were part-time positions, and that (b) the Labor Force participation rate FELL by 70,000 workers – making it (again) the lowest on record. That doesn’t make sense to me, because if all of these jobs were being created – wouldn’t you think a lot of people would be out looking and finding them? Now, I realize that I can’t fight the FED, but isn’t there someone somewhere that has to reconcile these massively different numbers, or is this your way of telling ADP to: ‘Try Harder.’

Finally Ms. Yellen, how well do you know Mr. Draghi of the European Central Bank (ECB)? On Thursday I watched and listened intently to Mr. Draghi’s remarks on television – promising to do QE (sometime). I know that Germany is fighting him on the QE idea. He didn’t sound all that convincing, and should learn how to: ‘Try Harder’. At the time of his announcement, our markets were down about 100 points. Then the headline came out: “ECB to prepare broad-based QE package for January meeting.” Our markets immediately went from being down 100 points, to being positive on the day. How are company fundamentals even a part of our market at this point? It seems that the only ways this ponzi-driven market can go up are by: printing money, expanding debt, low interest buybacks, and currency appreciation. We really need to: Try Harder.

Markets:

Factually:

- Mortgage applications are down 7.5%.

- Japan is in a recession, and continues to print money 4 TIMES faster than the U.S.

- France’s credit was recently downgraded to junk.

- The ECB announced that in the new year (February) they would launch their own QE program.

- The National Retail Federation said that Black Friday sales were down by an incredible 11.3%. Net online sales declined as a percentage of total sales, and the average consumer spent 10% less online ($159.55) than a year ago. As if to inject humor, experts said that the decline in sales was caused by the economy being so robust. They said that sales were off because everyone is feeling so good – that they don't need to shop for bargains on Black Friday. Somebody needs to: Try Harder for a better explanation.

Last weekend I looked at a lot of ‘market internals’ and decided that it was possible the markets could experience declines this week. On Monday the DOW fell 50 points, and you could make the case that we were in for some form of a pull back. But Tuesday came and not only did the markets gain back Monday's 50 points – they added on an additional 50. Wednesday and Thursday we ended up grinding slightly higher. On Friday, we almost ended the day ‘red’ until someone (with very deep pockets) came in – 5 minutes before the markets closed with a massive buy order. This one order took us from being down 80 point to up 60 points in 5 minutes. This type of action reeks of manipulation.

This week the Wall Street Journal talked about how J. Q. Public doesn’t have any discretionary income because everything from food to insurance to medical has risen beyond expectations. They also pointed out that tax payments (from the uber-rich) to the Government have been enormous this year. So between the illusion of growth and prosperity and the increased tax receipts – the U.S. Government is very happy with the stock market right now.

How long can this go on? The answer is: ‘Until it stops’. I don’t know, and I’m not sure that anyone does. It could end tomorrow, or it could end 6 months from now. The one thing I do know is that we are flirting with DOW 18K, and we truly belong at DOW 9K. One day this ponzi-driven market is going to come to an end, but until it does – all we can do is nervously pick positions and hold on for the ride. I continue to ‘lean long’ with our finger near the sell trigger.

Tips:

The only real news is that the U.S. Dollar is going to continue to rally. The U.S. Government needs to keep interest rates low, but still must attract foreign investors. The only way to do that is with a strong dollar. You see, foreign governments are awash in QE cash, and need a liquid place to put their cash without fear of it eroding in value via inflation. It seems that U.S. denominated assets are the only game in town. This means foreign cash will continue to flow into U.S. dollars, U.S. stocks and bonds. As a bonus, this kills the price of oil, puts a little more money into consumer’s pockets, and keeps Russia's ambitions in check because their oil revenue stream is drying up.

We closed the week with another run into all-time highs, and are within striking distance of 18,000 on the DOW. Next week, we have a busy economic calendar with JOLTS (Job Openings and Labor Turnover Report), Treasury auctions, and the retail sales report. I think that the market will continue to push higher, and I continue to position for more upside with one eye on the downside risk. I don’t want to get too short here, at least until after the end of the year.

My current list of potential candidates is as follows; GILD, WYNN, FLR, BMY, UTX, COST, TEVA, ILMN, JAZZ, ALXN, SPX, RUT and NDX. I may also look at an earnings play on NKE later this week.

At the end of October I began establishing a base in some major trends:

- The Japanese Yen will continue to decline in value – and I’m playing that by buying FXY – March 2015 - $83 PUTS – (up over 100%),

- The Euro will continue to decline in value – and I’m playing that by buying FXE – March 2015 - $124 PUTS – (up over 50%),

- The Healthcare Sector will continue to increase in value – and I’m playing this by buying XLV – January 2015 - $69 CALLS – (up over 100%), and

- The Consumer Staples Sector will continue to increase in value – and I’m playing this by buying XLP – January 2015 - $48 CALLS – (up over 50%).

For next week I’m looking at the following specifics:

- BMY – SELL = Dec2 – Put Credit Spread – 57.5 / 58 = Credit of $0.14,

- FDX – SELL = DEC – Butterfly – 180 / 177.5 / 170 = Credit of $0.34,

- GILD – SELL = Dec2 – Iron Condor – 99/100 to 110/111 = Credit of $0.16,

- DECK – SELL = Dec2 – Put Credit Spread – 94/95 = Credit of $0.17,

- ILMN – SELL = Dec2 – Put Credit Spread – 180/182.5 = Credit of $0.22,

- JAZZ – SELL = Dec2 – Put Credit Spread – 162.5/165 = Credit of $0.20,

- ALXN – SELL = Dec2 – Put Credit Spread – 187.5/190 = Credit of $0.42,

- UTX – SELL = Dec2 – Iron Condor – 106/107 to 116/117 = Credit of $0.14,

- COST – SELL = Dec2 – Put Credit Spread – 138/139 = Credit of $0.10,

- SPX – SELL = Dec2 – Put Credit Spread – 2030/2035 = Credit of $0.20,

- RUT – SELL = Dec2 – Put Credit Spread – 1150/1155 = Credit of $0.42,

- NDX – SELL = Dec2 – Put Credit Spread – 4220/4225 = Credit of $0.67, and

- NDX – SELL = Dec2 – Put Credit Spread – 4140/4050 = Credit of $0.32

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, November 30, 2014

This Week in Barrons – 11-30-2014:

You can fool some of the people all the time, and all the people some of the time, but you can't fool all the people all the time… Abraham Lincoln.

Thoughts:

Dear Ms. Yellen:

Are we being played for a fool? Let’s start with President Obama’s immigration policy – especially as to how it applies to California. Just last week the L.A. Times reported the following about Los Angeles County and their illegal immigrant population:

- 40% of all workers (10.2M people) are working for ‘cash’, not paying taxes, and are predominantly illegal immigrants working without green cards.

- 95% of all murder warrants, and 75% of the ‘Most Wanted List’ are illegal immigrants.

- 66% of all births are illegal immigrants on Medi-Cal (paid for by the CA. taxpayers).

- And almost 60% HUD occupied properties are illegal immigrants.

I would be remiss and foolish if I didn’t ask: Is there a PLAN to help California and the other border states handle this huge influx of 5M new illegal immigrants? Or is the plan to bankrupt these states, make them even more ‘beholding’ to the government, and to gather the 2016 Hispanic vote for the Democrats all in one ‘fell’ swoop?

By now you know that last Friday, OPEC decided (some thought foolishly) to keep oil production levels unchanged. The effect of lower oil prices is essentially QE4, as the consumer will have more money to spend. Oil ended Friday slightly lower then $66 per barrel with energy companies, oil transporters, and rigging companies all ‘taking it on the chin’. In my mind, OPEC is playing us all for fools. J. Q. Public may cheer for lower gasoline prices, but the bigger issue is our domestic oil and shale oil production – that is getting significantly squeezed on margins and could see a decline if oil prices remain under pressure. The Saudi’s ‘get it’. They are willing to inflict pain on our shale oil business, while at the same time put pressure on Russia's exports. The Saudi’s can sell every drop of their oil to China, and at the same time poke a stick in the eye of the ‘petro-dollar’.

Ms. Yellen, maybe I’m becoming foolishly paranoid, but aren’t the risks caused by a strong dollar becoming increasingly apparent:

- Disinflation pressure is continuing to rise, and bringing with it the risk of deflation.

- The trade gap is continuing to widen, which is beginning to stall U.S. GDP growth.

- And employment is coming under pressure as domestic manufacturing and production slow. This will cause U.S. multinationals to become less competitive, and encourage them to expand overseas to avoid currency risk.

Ms. Yellen, is the bigger fool the U.S. consumer? Factually, the largest driver of general consumer consumption is credit. It’s not just houses and cars, but understanding that the holiday season causes a huge expansion of credit spending. Currently credit cards are the number one consumer purchasing method. The average credit card balance for the U.S. consumer is: $7,743. Currently, the U.S. has over $847 billion in outstanding consumer credit card debt. But the problem is NOT ONLY the expansion of credit, but also stagnant wage growth combined with a questionable ability to re-pay the debt. Using the CPI to adjust for inflation, wage growth has actually declined over the past decade. J. Q. Public’s ability to pay down debt is becoming insurmountable, and producing larger balances carried for longer periods of time. Everyone always talks about the stock market rally, but seems to look past the parabolic debt acceleration that has occurred during that same time period.

I always remember a quote from Mark Twain: It is better to keep your mouth closed and let people think you are a fool, than to open it and remove all doubt.

Markets:

Factually:

- Orders for U.S. business equipment unexpectedly declined by 1.3% in October.

- Jobless claims increased more than expected – which is rare for the holiday HIRING season.

- Durable goods orders (removing planes and cars) fell by 0.9%.

- The Consumer Confidence Index was down sharply in October.

- Wal-Mart had 22 million people visit their stores on Thursday and Friday. That is more people (in one day) than Disney World gets in an entire YEAR.

The markets have been in a dogfight for the past week. We opened Monday with the DOW at 17,812 and ended the week at 17,828. While along the way there were dips and pops, the overall market really only traded sideways. That's a little bit disturbing because the Thanksgiving Holiday week is usually positive. But the market has felt ‘heavy’ for two weeks. While the market makers have dug in their heels and kept the wheels from flying off, I can sense a level of desperation and ‘control’. I will NOT be surprised if we see some true ‘red’ show up next week. A likely scenario is to see a bit of a pull back for a week or two, and then a final run up into the Holidays for ‘the Santa Claus rally’.

Right now the market is ‘flat’, and probing for direction. The market has certainly proven that it can pop higher for no apparent reason, but I’m looking for a bit of ‘profit taking’ this week. It might not happen, as the market makers have managed this market from command central, but it ‘feels’ like it should.

Tips:

The OPEC meeting has caused a new shift in the market. With oil prices at a 4-year low, the oil stocks and our largest sector (energy) have been crushed. This move should give the consumer more discretionary income, and should push the retailers and the airlines higher. But the market (in general) will have a more difficult time going higher – in the face of a declining energy sector. I think we will see more volatility on the horizon, and that large caps will do better than small caps in the short term. I have been looking for the Russell 2000 Small-Cap Index to go lower this coming week, and therefore investing in the TZA (the inverse ETF) should work nicely. This next week should be interesting as traders are back from the holiday, and will begin to digest all of this new information.

My current list of potential candidates includes: GILD, AAPL, WYNN, ALL, PII, HSY, FLR, BMY, DPS, TEX, SLW, TRV, SPX, RUT, DUST, VXX, TZA, SPY, IWM, JNJ, MSFT and UTX. Kroger (KR) reports earnings on Thursday, and I would like to get a trade in Kroger if I can get a good set-up.

I’m looking at the following Iron Condors (all with a Risk/Reward of less than 6:1):

- GILD – Dec1 – 95/96 to 106/107 for $0.14, - 1:6 risk v reward,

- RUT – Dec1 – 1155/1160 to 1210/1220 for $1.42 – 1:6 risk v reward,

- SPX – Dec1 – 2030/2035 to 2100/2105 for $0.80 – 1:6 risk v reward,

- WYNN – Dec1 – 169/170 to 185/186.5 for $0.22 – a 1:5 risk v reward,

I’m also seeing the following actions for next week:

- DUST going higher – which means the miners and gold are going lower,

- VXX going higher – which means a downturn in stocks,

- TZA going higher – which means the Russell 2000 (RUT) is going lower,

- SPY and IWM going lower – which means that the S&Ps are heading lower, and

- I’m showing JNJ and MSFT going higher.