This Week in Barrons - 1-11-2015

This Week in Barrons – 1-11-2015:

Thoughts:

“Just when you have all the answers – I change the questions”… Rowdy Roddy Piper

Dear Ms. Yellen:

As I understand it, the game plan was to:  a) lower interest rates and increase the money supply, b) this would spur borrowing, c) then borrowing would spur spending, d) spending would boost revenues and profits, and e) increased revenues and profits would boost job hiring.  The theory was that this would create a weaker dollar – which would also help to increase exports and more U.S. manufacturing jobs.  With a bonus being that the weaker dollar would allow us to repay our debts with a devalued currency.  The weak dollar would also make U.S. real estate attractive to international buyers.  However, every other nation also devalued their currency making the U.S. dollar the strongest horse in a very week race.  Isn’t this strong U.S. dollar working against you?  I remember from your writings that a strong dollar increases the risk of deflation, which causes recessions and economic stagnation to a nation.  So how far will you allow the dollar to rally before you take action?  Will you (if the dollar remains strong) continue with your zero interest rate policy (ZIRP) and perhaps launch another QE program?

Ms. Yellen, you obviously knew that the other Central banks (Japan and Europe) would launch huge QE programs of their own.  And by now you must have heard The Ben Bernanke’s quote from last week – when in the U.K. he said: “See, we did it. We solved the nation's problems".  But to quote the great WWF hero - Rowdy Roddy Piper: “Just when you have all the answers, I change the questions.”  I’m guessing that you were surprised by the strength of the strong dollar, and you’re only recourse (now) is to continue to talk ‘up’ how good things are, and then increase interest rates by a small amount in late 2^nd quarter.  I do NOT think that you will introduce any new QE.  I do (however) think that you will look for any event on which to blame our weak economy and reinstitute a new QE program.  Right now, that event seems to reside in the Ukraine. 

Ms. Yellen, it’s my guess that the U.S. will try and lure Russia into a confrontation in the Ukraine.  Russia will generate a response large enough to make a major newspaper headline.  Our response will be that Putin’s a madman, hell bent on taking over Europe, and therefore, we will be forced to build more jets, bombs, nukes, and high ticket defense items.  This political reaction will give the FED the opportunity to institute a new QE program due to: war fears, defense spending, and a sagging economy.  At that point you may even ‘take back’ the rate hike that you gave us before this all happened.  I think that you will accept virtually anything big that goes ‘bump in the night’ as a reason to come up with more stimulus and thereby weaken the dollar. 

That’s my 2 cents.

The Market...

This week:

-       The ISM Services Index and the Factory Orders Report were both lower than expectations,

-       The Prices Paid Index fell to levels not seen since 2009.

-       Oil continued to fall, and fall hard, 

-       The Baltic Dry Index (a measure of the shipping industry’s health) continued to fall,

-       Global bonds continued to trade below zero yield (negative interest rates),

-       Greece is on the rocks, 

-       The Eurozone is being rocked by the sanctions placed on Russia, 

-       And even China announced about a Trillion dollars of infrastructure spending to try and boost their economy. 

On Friday we had the monthly Jobs Report.  The headline told us that our Unemployment Rate fell more than expected to 5.6%, and that we created 252,000 jobs in December.  On the surface this appeared like a great report, but  the markets fell.  So let’s dissect the report a bit:

-       Average Hourly Wages fell 0.2%, and over 273,000 people dropped OUT of the labor force in December.

-       This lowered the Labor Participation Rate to 62.7% - a level not in almost 40 years.

-       Doing the Math:  246,000 NEW jobs were created, but 273,000 people dropped out of the workforce = creating a net LOSS of 27,000 individuals. 

-       Factually: 6.75M people have LEFT the workforce since 2008.

-       If we ADD back the 6.75M people who have left the workforce (and count them as being unemployed), the unemployment rate becomes 9.5%.

-       So the REAL unemployment rate is 9.5%, which is a ‘far cry’ from the headline report of 5.6%.  

-       So, THAT is the reason for the market decline following the jobs report on Friday.

Our markets are being propped up by Central Banks that have purchased over $29T worth of stocks.  We are (however) beginning to see cracks: (a) In 2014, the longest losing streak for stocks was 3 days.  In 2015, we’ve already had a 5-day losing streak.  And (b) the S&P has not suffered a 1.5%+ down day during the first week of a year since 2001.  We broke that record in 2015.  This market has been so ‘bizarre’ for so long, it’s finally getting ‘back to normal’.  For example, during 12 days in December the market moved almost 2,000 poionts.  And in January, we lost 452 points in 3 sessions, and then proceeded to gain back 533 points in two other sessions.

We are all witness to computer driven, algo-trading gone wild.  However, I’m noticing that the algorithms are ‘volume-biased’ to SELL harder than they BUY.  In other words, on the bad ‘down’ days the volume is usually really strong, but on the up days the volume is normally weak.  How can this be?  Well, when the selling hits, it is on fairly good volume, and when the selling is over it doesn’t take too much buying to produce oversized moves.  This is an indication of a ‘troubled’ market. 

This week marks the beginning of earnings season.  A company’s ability to ‘fudge’ their numbers will be the determining factor as to whether this market kicks into high gear and rallies, or if this choppy consolidation breaks to the downside.  To support a market at these nosebleed levels, earnings would normally have to be spectacular.  But in our current FED, QE, Japan carry trade, and zero interest rate policy environment earnings could stink and we could still go higher.  How?  A mere mention by a FED official that they won’t raise rates, or Mr. Draghi (in Europe) passing a giant QE program would ignite this market.

I do NOT think we're past the extreme volatility.  Between trying to game the earnings season, guessing what the EU might do concerning Greece and QE, and guessing what our own FED will do – we are going to see more chop.  The tug-of-war between those wanting out of the market and those wanting in – will continue.  Right now, it feels like we have a better chance at fading lower, but that could change in an instant if companies start telling us how wonderful things are.

TIPS:

Volatility is here in a BIG way.  Intra-day swings are adding up to 500 point moves.  There’s a big push between those that know the economy is a fraud, and those that toe the Wall Street line and see the U.S. as a shining beacon of strength.  Some want out, some want in, and that is causing this entire chop. 

My current list of potential candidates for this week is as follows: Gilead Pharmaceutical (GILD), Russell Small-Cap Index (RUT), Bio-Tech Index (IBB), S&P Index (SPX), Nasdaq Index (NDX), Costco (COST), Restoration Hardware (RH), Starbucks (SBUX), Nordstrom’s (NORD), Amgen (AMGN), Kroger (KR), Celgene (CELG), and Disney (DIS).

For next week I’m selling into this increased volatility using Iron Condors, and by using a specific stock’s bias via Put Credit Spreads (PCS) and Call Credit Spreads (CCS) – and playing the other side with a Broken-wing Butterfly.

-       AMZN – JAN5 – SELL the +245/-250 to -350/+355 Iron Condor for $0.62,

-       GILD – JAN – SELL the +90/-91 PCS – and BUY the +94 / -99 / +102 Call Butterfly, there is an upside ‘weekly squeeze’ in place,

-       IBB – JAN – SELL the +297.5/-300 PCS – and BUY the +307.5 / -315 / +320 Call Butterfly, there is an upside ‘4-hour squeeze’ forming,

-       IBB – FEB – BUY the 310 / 320 / 335 Call Broken Wing Butterfly,

-       LULU – JAN – SELL the +53/-55 PCS – and BUY the +58 / -60 / +61 Call Butterfly, there is an upside ‘Daily squeeze’,

-       PFE – FEB – SELL the 30 / 31 PCS – and BUY the 32 / 34 / 35 Call Butterfly, there are 30-min, 1-hour, and Daily squeezes forming,

-       RUT – MAR – SELL the +1040/-1050 to -1290/+1300 Iron Condor,

-       SBUZ – FEB – BUY the 80 / 85 / 90 Call Butterfly, 

-       BABA – JAN – BUY the 90 / 97.5 / 105 Put Butterfly (playing the downside), 

-       NFLX – JAN – BUY the 290 / 300 / 310 Put Butterfly (playing the downside), and

-       TLT – BUY in the 125 to 126.5 zone.

Look for:

-       UNH as it approaches my buy zone of $101.54,

-       DPZ as it approaches my buy zone of $96.60, and 

-       PZZA as it approaches my buy zone of $58.28.

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!

Disclaimer:

Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .

Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <rfcfinancialnews.blogspot.com>.

If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is the handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0

Creativity = http://vimeo.com/user8991651/review/105373017/0d0c374c28 

Investing = http://vimeo.com/user8991651/review/105373016/a5e84dd610

Marketing = http://vimeo.com/user8991651/review/105373015/d7237d026d

Sales = http://vimeo.com/user8991651/review/105373014/0e44b43962

To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/> 
Until next week – be safe.

R.F. Culbertson

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>

This Week in Barrons - 1-4-2015

This Week in Barrons – 1-4-2015:

“There’s gold in them thar hills.  Black gold.  Texas tea.”  TV show – ‘The Beverly Hillbillies’

Thoughts:

Ms. Yellen – As I remember the line from the TV show, I’m having trouble getting past the recent commodity prices.  Why are so many commodities coming under pressure?  My first reason would be the strong U.S. dollar – because that is the denomination in which most commodities are priced.  My second reason would be governmental price fixing – especially in the case of gold and oil.  I always worry when nations start disrupting the normal flow of supply and demand.  Don’t you worry about the physical demand for gold and silver out-striping supply – and creating a run on the commodity?  Don’t you worry about our relationship with Saudi Arabia – and the U.S. ‘basically’ forcing Saudi Arabia to embrace the BRIC nations and become the dominant oil supplier to China and South East Asia?

Speaking of artificially controlling supply and demand, your QE programs artificially controlled the ‘demand’ for bonds by artificially raising bond prices, lowering yields and making bonds unattractive for investors who are seeking a ‘safe heaven’ income.  For investors seeking any kind of return, you made the only option the equity market.  The artificial environment allowed investors to easily borrow more money, buy more equities, and force higher equity prices.  The December numbers for the NYSE Margin Index (investors borrowing funds to purchase more stock) hit new highs at over $450B.  Ms. Yellen, I’m wondering, when will this party truly end?  I’m thinking that you will never end the party because the U.S. has passed the ‘point of no return.’  What were once considered emergency room measures are now considered the norm.  You can’t stop buying our bonds, because with a ZIRP (zero interest rate policy) there aren’t enough ‘other’ buyers.  Increasing rates will attract more buyers, but that will cause the stock market to fall.  If our market declines rapidly, it will have a dramatic impact on the economy and moral – which could lead us into another recession.  I think you’re stuck.  But, does this mean that you’re considering investing in the stock market (aka like Japan) – in order to be able to increase rates and simultaneously prevent a stock market decline?  Because if we did suffer a market decline, many investors would receive margin calls – which would only increase the selling pressure.  Remember, a stock only has two ‘real’ prices – one when it is born (goes public), and the other is when it ends (is bought out or goes out of business).  All other stock market pricing is based upon perception influencing supply and demand.

And yes Ms. Yellen, I know – this time it’s different.  But time and time again, when investors have access to capital they will borrow and buy something – regardless of the fundamentals.  However, this time you and other governments are active participants in the markets.  You are out there purchasing assets and fixing rates – actively influencing supply and demand.  You are trying to control the story and drive perception.  I only see two stock market outcomes for 2015.   One is that we will all keep the faith – the party will continue – and the market will increase between 8 and 12%.  The other scenario is that we will see a significant market correction of over 25% - not due to specific stock scenarios, but rather our country’s complete reliance on your monetary policy along with government intervention.  I’m not sure you have the ‘bullets left in the gun’ to fight the next correction.  Interest rates are already at zero, you’ve already printed trillions, and you’re buying bonds and mortgage-backed securities.  

Honestly, maybe there’s more ‘gold in them thar hills’, or just maybe the FED’s oil well / printing press (along with many fracking situations) will be forced to shut down until everything stabilizes.  

The Market...

Looking backwards and forwards:

-       In 2014, the U.S. remained the world’s largest economy (17.8T), but China is gaining quickly (10.0T).  By 2025, China will become the world’s largest economy, and by 2024 India will become the world’s third largest economy.  Russia is predicted to remain in 10^th position through 2030. 

-       In 2014, unemployment rates hit 26% and 24% in Greece and Spain.  In 2015, will Germany continue to want to prop them up?

-       Will 2015 be the year that the U.S. ‘stops’ being the world’s belligerent bully?  Using the Sony disaster as an example:  (1) The U.S. was "absolutely sure" it was North Korea doing the hacking.  (2) Then it became: "The Russians did it."  Now, (3) it seems that it could have been some 3^rd-Party hackers (including X-Sony (laid-off) employees) that were pulling a prank.  How is it that we continue to make Page 1 headlines by pointing fingers at countries saying that we “have proof” – only to print a Page 12 retraction and go in a completely different direction?

-       Will 2015 be the year that our FED continues to ignore the laws of supply and demand?  In the case of currencies, nations are pseudo-defending and simultaneously devaluing their currencies in order to spur inflation and boost exports.  Nations want to reduce the value of their own currency in order to pay down their own debts with inflated money.

-       Will 2015 cause the oil market to completely come apart?  The current situation is OPEC versus ‘all comers’.  Due to the rise in ‘fracking’, the U.S. has increased oil production over 30% in the past couple of years.  Currently the U.S. is almost in a oil production ‘dead heat’ with Saudi Arabia (9.3M barrels versus Saudi’s 9.7M barrels).  I’m thinking that oil prices are going to have to come under serious pressure (enough to bring Saudi and the U.S. back to the negotiating table) before the oil pricing situation is resolved.  During that time we will see the stock market cheerleaders come out and tell the world how ‘low priced oil’ is good for the world.  All the while, entire regions and communities are losing their jobs.  After all, energy drives the economy and it takes a lot of $20 savings at the pump to replace even one $90k / year job that is lost.  Eventually oil will bounce back into the $70-$80 range, but the first quarter could be in for some oil volatility which will cause market volatility as well.

-       In 2015, I think we will see an early increase in the value of the dollar.  Whether this causes the U.S. Mint to finally say ‘no mas’ in terms of issuing additional physical gold and silver coins and bars – is anybody’s guess.  Also, I’m wondering (with the initial strength of the U.S. dollar) how long oil will continue to be priced in Petro-Dollars.

-       In 2015, because the dollar strength is going directly against the FED – we could see them architect a pseudo-collapse in the dollar in order to spur inflation and increase commodity prices.  The danger here is if the world starts ‘dumping’ dollars (much like in the 70’s) – what will the FED do?  We are 7 years into the ZIRP (zero interest rate policy), bond buying, mortgage-backed securities buying, and QE policy – which is causing physical demand to be disconnected from the paper market.  Will this gap be bridged in 2015?

On Monday, we may see a bit more selling, but nothing horrible.  The volumes will come back up and on Tuesday and Wednesday we should see a decline in volatility, and a renewed push higher toward the end of the week.  I think we could be setting up for a sell-off in January – perhaps a 3 to 4% correction.  But watch the Russell index to see if and when this may happen.  I think that market valuations have moved beyond the traditional guidelines of company fundamentals and earnings.  This market’s value has become ever more dependent upon Fed intervention and perception.

TIPS:

Obviously I’m a big believer in learning how to manage your own finances, because of the fee structure that is being charged by financial advisors for ‘sub-par’ performance.  Over time, 96% of the total mutual funds will under-perform the S&P.  Vanguard offers an S&P Index Fund that only charges a 0.14% annual fee.  This compares to: (a) the average Non-Taxable Account fees of over 3.17% annually (20X Vanguard), and (b) the average Taxable Account fees of over 4.17% annually (30X Vanguard).  These fees are a percentage of the amount invested.  If I compared them to the profits that they generate, these fees account for over 30% of an average managed account’s profits.

My trading goal for 2015 is 2.3% per week – hitting fewer ‘home-runs’ and more ‘singles and doubles’.

-       I will introduce a ‘Trade of the Day’ – that will appear on both my Twitter and StockTwits.com feeds – simply follow me as ‘taylorpamm’

-       Due to dramatically increased market volatility, I will be reducing my emphasis on the weekly, ‘out of the money’ Iron Condor.  I will be giving myself the ‘gift of time’ by concentrating more on investments 30 days out, and cashing them in 10 days out.

-       I will be concentrating more on the directional and closer ‘to the money’ side of things.  This will allow me to tilt the Put Credit Spread (PCS) or Call Credit Spread (CCS) risk/reward more in my favor.

-       This will allow me to do ‘free’ trades, by using the proceeds from the sale of the PCS or CCS to either purchase a Debit Spread (Put or Call) or a ‘Broken-Wing Butterfly’.

-       I will begin exiting trades when (a) 80% of the profit has been achieved, or (b) when a two times the ‘average true range’ stop loss has been ticked.

-       I will also (on a regular basis) buy TLT Calls when it reverts back to its 21-day moving average, and sell those same TLT Calls when they exceed their 1.272 extension or their 1 standard deviation.  This trade worked like ‘clockwork’ during 2014 and I see no reason that it will not continue working in 2015.

Here’s an example of how to construct a virtually ‘free’ trade.

1.    Let’s assume you believe that American Airlines (AAL) is headed higher after earnings (earnings are on 1/27 before the open).

2.    American Airlines ($53.91) has a ‘Daily Squeeze’ forming – and all indications are that it will fire long.

3.    Step 1 = SELL the February (monthly – 2/20) -55 / +52.5 Put Credit Spread for $1.24 per contract – 10 contracts netting you $1,240 (cash – pushed into your account) – with a maximum risk of $1,260. A virtual 1:1 risk to reward ratio.

4.    Step 2 = BUY 7 contracts of the February (monthly – 2/20) +52.5 / -57.5 / +60 Call Butterfly – costing you $1,134.

5.    Netting this together with the Sale of the Credit Spread – you have a ‘free’ trade.

6.    If AAL closes above $55, you net an additional $2,000 to $4,000 when you sell your 7 Butterfly contracts.  If AAL closes between $52.50 and $55 you will basically have a ‘scratch’ trade.  And if AAL closes below $52.50 you lose $1,260.

My current list of potential candidates for this week is as follows: Apple (APPL), Gilead Pharmaceutical (GILD), Russell Small-Cap Index (RUT), Bio-Tech Index (IBB), American Air Lines (AAL), and Southwest Airlines (LUV).

For next week I’m selling a specific stock’s bias via Put Credit Spreads (PCS) and Call Credit Spreads (CCS) – and playing the other side with a Butterfly.

-       AAPL – JAN – SELL the +105/-107 PCS (Put Credit Spread) – and BUY the +115 / -117 / +118 Butterfly to take advantage of an earnings run-up,

-       GILD – JAN – SELL the +90/-91 PCS – and BUY the +94 / -99 / +102 Butterfly, there is an upside ‘weekly squeeze’ in place,

-       IBB – JAN – SELL the +297.5/-300 PCS – and BUY the +307.5 / -315 / +320 Butterfly, there is an upside ‘4-hour squeeze’ forming,

-       RUT – MAR – SELL the +1040/-1050 to -1290/+1300 Iron Condor,

-       AAL – JAN – SELL the +48/-49 PCS – and BUY the +54 / -56 / +57 Butterfly, there is an upside ‘Daily squeeze’ forming, earnings are on 1/27, working on the FEB trade as we speak, 

-       LUV – JAN – SELL the +38/-39 PCS – and BUY the +42 / -43 / +43.5 Butterfly, there is an upside ‘4-hour squeeze’ forming, earnings are on 1/22, working on the FEB trade as we speak, and

-       TLT – SELL our existing +122 / -128 Call Debit Spread – and be ready to re-load on a pullback to the 21 EMA.

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!

Disclaimer:

Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .

Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <rfcfinancialnews.blogspot.com>.

If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is the handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0

Creativity = http://vimeo.com/user8991651/review/105373017/0d0c374c28 

Investing = http://vimeo.com/user8991651/review/105373016/a5e84dd610

Marketing = http://vimeo.com/user8991651/review/105373015/d7237d026d

Sales = http://vimeo.com/user8991651/review/105373014/0e44b43962

To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/> 
Until next week – be safe.

R.F. Culbertson

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>

This Week in Barrons - 12-28-2014

This Week in Barrons – 12-28-2014:

Thoughts:

Dear Ms. Yellen:

As I look back over 2014, I’m thinking that there are areas where we (as a nation) could improve.  The other day, I was reminded of the following scenario.  A Japanese company and an American company decided to have a rowing race.  Both teams practiced long and hard, but on the big day – the Japanese won by a mile.  American senior management formed a committee to investigate and recommend appropriate actions.  Their findings were:

-       The Japanese had 8 people rowing and 1 person steering.

-       The Americans had 1 person rowing and 8 people steering.

-       Given the large disparity, the committee wanted another opinion and hired a high-level consulting group.

-       The consulting group concluded that there were too many people steering, and not enough people rowing in the American boat.

Armed with recommendations in hand, the Americans immediately:

-       Reorganized the rowing team into: 4 steering supervisors, 3 area steering supervisors, and 1 assistant superintendent steering manager.

-       Implemented a new performance system that gave the 1 person rowing the boat a greater incentive to work harder.

-       Re-named the program: “The Rowing Team Quality First Program.”

-       And initiated discussions surrounding getting new paddles, canoes, other equipment, and extra vacation days for practices and bonuses. 

A year later the race was held again, and this time the Japanese won by 2 miles.   American management was humiliated and immediately initiated the following:

-       They laid off the single rower and blamed him for poor performance.

-       They halted the development of a new canoe, sold the paddles, and cancelled all capital investments in new equipment.  

-       The money they saved was distributed to the Senior Executives as bonuses.

-       And decided to outsource next year’s racing team to India.

Ms. Yellen – although the above was written in jest – the issue within our ‘American’ labor force starts with there being an abundance of unskilled over skilled labor.  And even among the skilled labor positions, only certain sectors are in demand for the high paying jobs.  The highest paying degrees are in: programming, engineering, math and science.  However, our American colleges produce far more graduates with degrees in psychology, political science, history, and English.  In fact, the majority of people that get these ‘NOT in demand’ degrees rarely find a job in their field.  Also (from statistics compiled by Complete College America), only 19% of full-time students earn their degree in 4 years.  This same report shows that most students take far too few credits per semester, and fail to register for required courses on time.  In fact, the ONLY graduation category that is not declining is the one devoted to – foreign students.  Not only are students from abroad graduating on time and with better grades, but they are also the majority of students in the math and science degree programs.  The majority of these foreign students do NOT stay in the U.S., but rather return home to their native countries.  These students are under far more pressure and expectations, because (in many cases) their parents have struggled to pay for them to leave their country in order to get a degree in America – the land of opportunity.  I guess it’s no wonder that the Japanese team won the rowing contest – aye?

Ms. Yellen, continuing on the education theme.  This week I read an article about the leaders of Singapore and Jamaica.  In 1965 both nations were independent, had about 5 million citizens each, with Jamaica having a slightly higher per capita GDP than Singapore.  The leader of Singapore decided to borrow and invest heavily in education, basic infrastructure, and took a ‘Free Market’ approach to entrepreneurship.  The leader of Jamaica borrowed money, and built a huge social program focused on exporting agriculture and trying to expand government ownership.  By 2000, Singapore’s per capita GDP was over $30,000 while Jamaica’s was a mere $4,800.  Singapore’s investment in education and encouragement of free market entrepreneurialism allowed the nation to thrive, while Jamaica’s massive socialism, central planning, and government ownership simply stifled growth.  Ms. Yellen, I’m assuming if we raced Singapore – the American team would suffer the same fate as we did against Japan.  Therefore (if you have a minute), could you try and schedule a race between the Americans and the Jamaicans?  

Thanks and have a Happy New Year.

The Market:

Factually:

-       Consumer spending rose 0.6% while New Home sales fell another 1.6% in November.

-       November’s durable goods orders were expected to rise 0.3%, but instead fell 0.7%.

-       The Japanese parliament just approved an additional 3.5 trillion yen stimulus package – so it’s fair to say that traders will be happy as they contemplate more ways to utilize the carry trade.

-       Blackrock told its investors that corporate profits would be 85% LOWER if corporations were forced to comply with GAAP (Generally Accepted Accounting Principles).  Yes – corporations are almost doubling their profits by using false accounting methods.  So if corporations are allowed to report double their earnings, what numbers can we believe?

-       3^rd Quarter GDP was revised to 5%, with the bulk of that being increased healthcare spending over Obama-Care.  Some are reporting that healthcare costs in 2015 will rise from 8% to 26%, and that could trigger a corresponding collapse in bond prices.

-       The issue with tumbling oil prices is that the energy sector has been the main driver of job growth during our recovery.  The latest jobs report showed a sharp downturn in the number of oilrigs operating in the U.S.  This will be just the beginning of cutbacks as there is a normal 18-week lag between oil price reductions and the number of rigs in operation.  You can expect the rig count at U.S. shale-oil production sites to drop off at the beginning of the New Year.  This is because the low oil prices will cause many of the rig contracts (which expire at the end of this month) to go un-renewed.

-       And the International Longshore and Warehouse Union has started a work slow-down as negotiations have stalled over their expired contract.  The slowdown is affecting everything from merchandise supplies destined for U.S. retailers to McDonalds’ french-fry supplies headed for Japan.  As a result, global economic data involving trade, durable goods and retail sales could be softer than expected in the coming weeks.

Personally, I received a terrific book this Christmas: “Money – Master the Game” by Tony Robbins.  The focus of the book is that every individual needs to (and can) manage his or her own money.  For example: say someone came to you with a deal where YOU would put up 100% of the capital, and YOU would take 100% of the risk on an investment.  And IF the investment made money, THEY would take over 60% of the profits (to be paid to them in the form of fees).  And, IF the investment lost money, YOU would absorb 100% of all the losses, BUT you would still owe them their fees.  Who would take such a one-sided investment?  The answer is that millions of people do that everyday when they buy a mutual fund.  Why do millions of people do it?  They do it because they never do the math.  For instance: If you made a onetime investment of $100,000 at age twenty, (assuming a 7% annual growth rate) you would have $574,464 by the time your 80^th birthday rolled around.  BUT, if you paid the normal management fees and other expenses associated with a mutual fund – your ending account balance would only be $140,274 over that same period of time.  That means you paid 77% of your profits ($439,190) to your account manager / broker.  That is the single best reason I ever heard for someone to learn how to manage their own finances.

I bring this up because our retiring population is in trouble.  Here are a couple of facts that: “Retirees Won’t Tell You”:

-       They’re running out of money – as 33% have less than $1,000 in savings.

-       They’re finding retirement stressful and lonely.

-       They’re finding that their healthcare costs are enormous.

-       They’re planning on moving back in with their children.  Currently over 43M adults care for someone over 50 – and that number is rising.

-       And they’re coming after traditionally entry-level jobs.  The percentage of workers 65 and older who are in the labor force has risen from 11.5% in 1992 to 18.5% in 2012, and is projected to hit 23% by 2022

This week we should see the market continue to move sideways and up, but it’s times like these when I’m most nervous.  The safest way to play this market is in the ETF arena because as the overall market rises – a specific stock may not.  There are ten major sectors in the S&P.  If the market dislikes a particular sector or stock on any given day – you may get crushed holding that particular stock.  But if the other sectors move high enough, the overall S&P would rise on the day.  This is why you can see the SPX and the SPY (the ETFs for the S&P index) rise on a day when even big stocks like Apple, Microsoft, 3M and Cisco are down.  For the next week I like the indexes: SPX, SPY, DIA, RUT and IWM.  I think that they will continue higher, but don’t be surprised if we have a ‘red’ day here and there.  We're overdue for one – so that the technicals catch up with the underlying issues.

Tips:

I’d like to take this time to refresh your memory on two income strategies that I use on a weekly basis: (a) the iron condor, and (b) the butterfly & put credit spread combination.  First, a ‘spread’ is the selling and buying of two similar options – with the same expiration date and quantity.  When you ‘sell’ a spread – money will be ‘paid’ to you and deposited into your account.  The low end of the spread is called a ‘Put Credit Spread’ (PCS), and is accomplished by selling a put and buying another of lessor value (in the same quantity and expiration date).  The upper end is called a ‘Call Credit Spread’ (CCS), and is accomplished by selling a call option and buying another of higher value (in the same quantity and expiration date).  You make an ‘Iron Condor’ by combining the put credit spread and the call credit spread.  You make money on the ‘Iron Condor’ as long as your stock is between your two strike prices at options expiration.  A picture describing such a transaction is below.  The timeframe for this strategy is anywhere from a week to 6 months.  It is often used on indexes and other stocks that don’t move around that much.  I would NOT use the strategy on high volatility stocks such as Tesla (TSLA) or Green Mountain Coffee (GMCR).

The second income strategy that I use is on stocks that are moving in one direction (let’s assume rising for this example).  I sell a Put Credit Spread (as was described above) to take in some premium to pay for a Butterfly – creating (in essence) a free trade.  The Butterfly (as shown below) is the sale of an option – surrounded by the purchase of two other options.  This creates an earnings effect that peaks where you sold the option and rises or flattens where you purchased the surrounding options (often called the wings of the Butterfly).  I use this strategy on the up side when stocks are rising – such as over the Christmas holidays, run-ups into earnings, or when a particular stock is ‘bouncing’ higher after being punished too badly.

The market has put in an excellent run of over 1,000 DOW points and is currently extended.  But having said that – we are in the ‘Santa Claus’ portion of the ‘Santa Claus Rally’ so I would expect an upward bias for next week.  We could see some profit taking – for those brokers who wish to take advantage of the 3-day clearing period, but for the most part – we should move slightly higher.  

My current list of potential candidates is as follows: Apple (APPL), Gilead (GILD), Restoration Hardware (RH), Kroger (KR), Polaris (PII), United Health Care (UNH), 3M (MMM), Marathon Oil (MRO), Devon Energy (DVN), CVS, Chicago Bridge and Iron (CBI), Home Depot (HD), Clorox (CL), Caterpillar (CAT), and John Deere (DE).

Our base positions continued along their winning ways last week in: FXY (Japanese Yen to the downside), FXE (the Euro exploded to the downside), XLP (Consumer staples exploded to the upside), and XLV (Healthcare gradually moved to the upside):

-       FXY – March 2015 - $83 PUTS, 

-       FXE – March 2015 - $124 PUTS,

-       XLV – January 2015 - $69 CALLS, and

-       XLP – January 2015 - $48 CALLS. 

For last week – our WAG, NKE, FB, SPX, NDX, and RUT trades went in our favor, with the GILD and PCLN going against us.  For next week I’m selling this market’s upside bias via Put Credit Spreads (PCS) – and playing the upside with Butterflies.

-       AAPL – JAN – SELL the +105/-107 PCS (Put Credit Spread) – and BUY the +115 / -117 / +118 Butterfly to take advantage of an earnings run-up,

-       GILD – JAN1 – SELL the +88/-89 PCS – and BUY the +94 / -96 / +97 Butterfly, 

-       GILD – JAN – SELL the +82.5/-84 PCS – and BUY the +94 / -99 / +102 Butterfly, 

-       IBB – JAN1 – SELL the +287.5/-290 PCS – and BUY the +307.5 / -315 / +320 Butterfly,

-       IBB – JAN – SELL the +280/-282.5 PCS – and BUY the +307.5 / -315 / +320 Butterfly,

-       KR – JAN – SELL the +60/-62.5 PCS – and BUY the +62.5 / -65 / +67.5 Butterfly for an earnings run-up,

-       CBI – JAN – SELL the +36/-38 PCS = Credit of $0.20,

-       NDX – JAN1 – SELL the +4075/-4100 PCS = Credit of $2.03,

-       SPX – JAN – SELL the +1990/-1995 PCS = Credit of $0.40,

-       SPX – JAN1 – SELL the +2050/-2055 PCS = Credit of $0.40, 

-       RUT – JAN – SELL the +1135/-1140 PCS = Credit of $0.40, and 

-       RUT – JAN1 – SELL the +1170/-1175 PCS = Credit of $0.37.

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!

Disclaimer:

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PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

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