This Week in Barrons – 12-21-2014:
“The Federal Reserve can be patient which is
consistent with a considerable time methodology”… Ms. Janet
Yellen – Dec 17, 2014
Thoughts:
Dear Ms. Yellen:
Ms. Yellen (or should I
say Ms. Claus), thank you for the ‘Santa Claus Rally’ into year end. It was clear that the market could not have
done it without you. It’s very clear
that the market’s most recent sell-off was NOT about
oil or the Russian ruble, but rather it was all about the FED ending it’s free
money policies and raising interest rates too soon. After all, “What changed?” Oil is still below $58/barrel, and the Russian
ruble is still devalued. The only
element that changed was that you confirmed the FED’s Zero Interest Rate Policy
(ZIRP) and reaffirmed that your asset purchase policies are here to stay for
the foreseeable future. Honestly, I
knew that a lot of fund managers were terribly lagging the big indexes, but
gaining 421 points on top of a 288-point gain is nothing short of ‘a Christmas
Miracle’.
But then of course there
was the obligatory global insanity. It
seems the Swiss have also lost their economic compass, as they have cut their deposit
interest rates to negative. Yes, in
order to deposit money into a Swiss Bank you will now have to PAY the bank one
quarter of a percent to hold your money.
I find that comical on many levels.
(a) The business of banking is to pay out ‘interest’ on deposits – not
the other way around. (b) The Swiss
government and ‘banksters’ recent spent millions to convince the Swiss citizens
that they should vote against a referendum that would require the Swiss currency
to be backed by additional gold reserves. So as soon as they were successful in voting
the proposal down – they turn around and stabbed J. Q. Public ‘in the back’ by introducing
negative deposit rates.
Ms. Yellen – I simply
loved your press conference following Wednesday’s announcement. Unfortunately, I left my ‘Alan Greenspan
Decoder Ring’ at home. You talked of
‘being patient’, yet said (at the same time): ‘If the data changes, we will
move quicker than expected”. You talked
of ‘not normalizing policy’ over the next two meetings, but then said: “That
could change with the data.”
Congratulations, I truly could not figure out a direction to your remarks,
and I’m sure that was the intent. But
the general consensus is that prior to your talk, it was clear that Santa was
going to deliver ‘lumps of coal’ into various Christmas stockings. Prior to Wednesday, the 800+ point drop over
the prior 7 sessions had traders ‘antsy’ and almost convinced that Santa wasn’t
coming. Your verbiage and press
conference successfully erased over 7 days of selling and then some.
Finally Ms. Yellen, what’s going on with
Cuba? Back in July there were rumblings of
Russia putting bases closer to the U.S.
After all, the U.S. had just unilaterally broken a 30-year old agreement
by moving NATO bases closer to the Russian border. It was in July when Russia announced the
re-opening of their Lourdes facility in Cuba. At the time I understood why Russia would do
that – my only question was: ‘What would the U.S. do about it?’ Now the pieces are beginning
to fall into place. Since there are no
missiles on the island as of yet, we really don't have any legal right to do
blockades of the surrounding waters. So
we are playing the ‘economic card’ and trying to get the Cubans to not allow
Russian military weapons (of any real threat) to be moved onto their
island. I think it’s a true show of: ‘Keep your friends close, and your
enemies closer.’
Merry Christmas Ms. Yellen – and thanks for the rally!
The Market:
WOW pretty much sums it up.
We gained over 700 points in two days. I expected the market to trade higher – just
not this much this fast. After the previous
week’s 4% drop, I thought we would move higher into the year-end – but I had no
idea that we could do this. We haven’t
seen a two-day romp like this in years.
For those of you that
didn’t follow, allow me to briefly recap this week’s sessions:
-
Monday we ended
the session in the red.
-
Tuesday we gained
260 points in the first hour of trading, and after the DOW travelled over 800
points (both up and down) we ended the day down by 111 points.
-
Wednesday we
were up 145 DOW points out of the gate – and ended up 288 due to the FED
language. But the big question on
everyone’s mind was: “What did they say again?”
-
Thursday we
played a quick game of ‘Can You Top This’, and the answer was YES – by gaining
over 400 points.
-
And Friday we
ended the week by gaining 28 points on the day.
This week is why I say that
there are no longer any fundamentals in this market. We did not gain over 700 points on good
earnings, employment or opportunity information. We got there on the hope of Ms. Yellen
leaving interest rates alone. That means
that there will be more debt creation, more stock buy backs, and more borrowed
money for our banks to ‘play cowboy’ with in the markets.
Factually:
-
In January the
Russian ruble was trading 30/dollar, and this week it touched 80/dollar. This week Russia’s Central Bank raised
interest rates from 10.5% to 17% percent – hoping to curb its currency
collapse.
-
In June oil was
$105/barrel, and this week we touched $53/barrel.
-
The Consumer
Price Index (CPI) is disinflationary – falling from 1.7% in October to 1.3% in
November – the largest month-over-month decline since 2008.
-
Mortgage
applications are falling again – dispelling the myth that cheaper gas was going
to lead to a boom in housing.
-
The Empire State
Manufacturing Index reported more stalled infrastructure projects. Estimates are that a Trillion dollars worth of
oil related projects alone have been put on hold.
-
No one thought
that they’d be seeing $53/barrel oil, and because of that –Trillions are
collaterally under-funded. It's one
thing to delay a drilling project because the price of oil doesn't warrant the
investment. But when thousands of
contracts and loans have been made, based on the projections of $100/barrel oil
– there’s real pain being felt out there.
The ripple effects are expanding in all directions.
I tend to revert back to:
‘Correlation vs Causation’. The world
prefers lower oil prices. Lower oil
prices allow for: lower gasoline prices, lower energy prices, lower shipping
costs, lower transportation costs, and lower costs for oil derivative products.
This hurts the top line for energy
companies, but energy companies are not the total market. The fall in oil prices has more to do with politics
than any correlation to supply and demand. In fact, the global demand for oil continues
to rise, and the current supply level is NOT causing a glut.
The macroeconomics picture
is telling us:
-
Bonds are higher
than they have been in decades - telling us that the economy is in serious (Depression
Era) trouble.
-
Our own ‘Jobs Report’
was so bolstered by seasonal adjustments that it bore no resemblance to
reality.
-
The Baltic Dry Index
(the measurement of world-wide shipping traffic) has fallen 45% in a month.
-
Student loan
debt is well over a trillion dollars, U.S. wages have been flat for the last 15
years, and Obama-Care has created the 30-hour full-time / part-time job.
On the microeconomics side
of things we have:
-
Lower oil and
gasoline prices,
-
Stores
introducing December as ‘the low priced month’,
-
And people
spending as much as they can scrape up.
You add that up and
there's no question that our global economies are whistling past the graveyard.
We have a tale of two markets. In the very short term, the market could continue
to run a little bit higher. But in the
longer term, we have some really big problems that simply can't be solved via
standard economics – the numbers are just too big.
Tips:
Honestly, we’re a tad early for the ‘Santa Claus’
rally. That rally is normally reserved
for the last few trading days of the year, and then the first 5 of the New Year.
But as everyone trips over himself or
herself to be involved, it tends to appear earlier each year.
The market closes at 1 pm on
Wednesday, and is closed on Christmas day. With this being a Holiday shortened week, many
of the upper level traders are starting their holiday this weekend and not even
manning the posts next week. With that
being the case, I think we will consolidate, grind sideways and slightly higher
for most of the week. I’m looking for a
couple red dips, some small pushes higher, and possibly pushing energy slightly
higher if the rebound continues.
My current list of
potential candidates is as follows: Terex (TEX), Gilead (GILD), PayChex (PAYX),
Amgen (AMGN), Nike (NKE), Wynn (WYNN), Chicago Bridge & Iron (CBI), McDonalds
(MCD), CostCo (COST), Restoration Hardware (RH), IWM and SPX.
Our base positions did
nicely last week in: FXY (Japanese Yen to the downside), FXE (Euro to the
downside), XLP (Consumer staples to the upside), and XLV (Healthcare to the
upside):
- FXY – March 2015 - $83 PUTS,
- FXE – March 2015 - $124 PUTS,
- XLV – January 2015 - $69 CALLS, and
- XLP – January 2015 - $48 CALLS.
- We’re going to add another one – TLT – Bonds – Buy
the 122 / 128 Call Debit Spread on a pullback.
For next week I’m still
selling this increased volatility via Put Credit Spreads (PCS) – and playing
the upside with Butterflies. For the
Iron Condors listed below – I am purchasing their ends separately in
order to take advantage of these huge swings:
- BWLD – JAN – SELL the 160/165 PCS (Put Credit Spread),
- GILD – DEC4 – SELL the 103/104 PCS = Credit of $0.15,
- NKE – DEC4 – SELL the 92/93 PCS = Credit of $0.10,
- FB – DEC4 – SELL the 76/77 PCS = Credit of $0.08,
- WAG – DEC4 – SELL the 68.5/69 PCS = Credit of $0.07
(earnings next week),
- PCLN – DEC4 – SELL the 1147.50/1150 CCS (Call Credit
Spread) = Credit of $0.20,
- NDX – DEC4 – SELL the 4200/4205 PCS = Credit of $0.50,
- SPX – DEC4 – SELL the 2025/2030 PCS = Credit of
$0.40, and
- RUT – DEC4 – SELL the 1165/1170 PCS = Credit of $0.47.
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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