RF's Financial News

Sunday, March 15, 2015

This Week in Barrons - 3-15-2015

This Week in Barrons – 3-15-2015:

“You do understand - you’re just selling Lingerie…” Mr. Wonderful on Shark Tank

Thoughts:

A recent episode of Shark Tank showed the CEO of a small, lingerie company attempting to sell 5% of her company to the ‘Sharks’ for $500,000. That investment would give her lingerie company a valuation (right out of the gate) – of an absurd $10M. Did she receive her recent MBA and Law degrees from Stanford University – yes. Was she originally given $850k for 17% of her company by a wealthy investor – yes. Did she come on to the show with a ‘chip on her shoulder’ – yes. And yes – she found out that arguing with the ‘Sharks’ is a difficult (and costly) negotiating strategy.

‘Smarts’ certainly count for something, as does personality, caring, understanding and doing your homework. In this case the CEO was so busy trying to get rich that she forgot to embrace and display her passion for the underlying business. In this day and age, so often the goal of a young company is obtaining VC cash, rather than building the business with real customers. Just because you didn’t go to the best school, or weren’t the smartest person on the block, doesn’t mean that you can’t be successful and happy.

The ‘takeaway’ from the last 20 years is that the traditional path no longer works. ‘Professional’ is no longer the highest rank in our society. A good college degree gets you a ‘ticket’ to the middle of the pack. If you want to win, you will need to learn so much more than is ever taught in schools. You often learn these lessons from parents and mentors. These are the people that will take you under ‘their’ wing, out of the goodness of ‘their’ heart, for $0 and 0% of your company. We see this very rarely today. It’s a dog eat dog world, and there are very few altruistic dogs out there. So – yes perseverance counts, just not as much as charisma, charm, and the ability to get along.

In this case, the CEO’s numbers were insane. She believed since one person invested in her business at an obscene valuation, everyone else would do the same. She had been a winner all her life – why would ‘Shark Tank’ be any different? What she found out was that no one was interested in her, or her business. More often than not, winners put their hearts and souls into a business, and when they hear ‘NO’ – they get angry and double down. They become convinced that they are right, the world is wrong, and they are going to prove everybody else inadequate. This is often a recipe for disaster. The real winners in life: (a) admit when they are wrong, (b) learn from their mistakes, (c) change and pivot, and (d) then deliver a solution that everybody wants.

It all starts with admitting failure. Wining at the game of education is often not a good precursor for admitting failure. Lucky for us – the game of education is NOT the game of life.

Market:

Factually this week:

- Retail sales fell 0.6%,

- Initial jobless claims still averaged over 300K a month,

- 1^st Q GDP estimates were cut by Goldman to 2.2%, and Barclays to 1.5%,

- Intel warned that 1^st Q revenue will come in under estimates,

- The Chinese are putting the finishing touches on their ‘non-U.S. Dollar’ alternative to the Global SWIFT payment processing system,

- Thailand and South Korea cut their interest rates, bringing the total to 23 nations that have reduced interested rates in 2015,

- McDonalds announced their 9^th consecutive month of falling sales,

- Japan’s GDP continued to come in lower than estimates,

- The Greeks are again making noise about exiting the Euro, and

- The lunatics in Brussels are suggesting the EU create their own army, instead of relying on NATO.

This week David Stockman (previous Director of the Office of Management and Budget under Reagan and 20-year veteran of Wall Street) came out and said: “Never has there been a more artificial (indeed phony) gain in the stock market - than the 215% eruption orchestrated by the Fed since the post-crisis bottom - six years ago. There is nothing fundamental, sustainable, logical or warranted about today's S&P 500 index at its current levels. The U.S. economy remains mired in even more debt, less real productive investment, fewer breadwinner jobs and vastly more destructive financialization and asset price speculation than had been prevalent at the time of the Lehman event in September 2008.”

February 2015 was the single biggest month on record for corporations buying back their own stock, and March is shaping up to possibly surpass February. Even more interesting is that company ‘Insiders’ (people who get paid in stock bonuses) are SELLING their own corporation’s stock at the fastest pace on record. These are the same ‘Insiders’ that are making the corporate buy-back decisions in order to make themselves ‘rich’. For example: during the week of February 11^th, the ratio of ‘Insider’ sellers to buyers was 17 to 1. That’s 17 TIMES more ‘Insiders’ selling stock than buying it. And those same corporations were buying back billions of dollars of their own stock in order to keep the stock price high for the ‘Insiders’ that were selling. Thus far in March, some of the announced stock buybacks have included: GM for $5B, Boise Cascade for $2B, Best Buy for $5B, Stryker for $2B, and Qualcomm for $15B.

However it’s not the buybacks or the data that are making the FED uneasy – it’s the rapid dollar rally. The dollar rally is bringing on talk of ‘disinflation’ and ‘deflation’. Unfortunately, to fight either of these you need to reduce interest rates, print more money, or both. European and Japanese QE, coupled with the ‘official ending’ of our own QE is what is driving the dollar higher. What is putting selling pressure on the equity markets is the assumption that the Fed is about to raise rates, which (ironically) further fuels the dollar rally. I suspect we will shortly see a shift in focus of our FED from job creation and unemployment, to the concerns about the dollar and deflation. Finger pointing toward Japan and Europe will then follow, and we will be told that they are both the cause of our market’s demise.

This Wednesday the 18^th will be the next meeting of the FED. Market volatility will continue to ‘rule the roost’ until we learn whether the FED drops the words ‘being patient’ from their comments regarding interest rate increases. This market is completely reliant upon debt, low interest rates and free money to sustain the price of stocks. In terms of the statement itself: if the word ‘patient’ is still in their statement then we will see the markets rejoice. If however the word ‘patient’ is removed from the statement, the market will fear a series of rate hikes are coming and immediately sell off. The ‘cheerleaders’ will then come out in force (backing up the FED) saying: “This is a good thing. Our economy is so strong that the FED is getting out in front of this.” The bottom line is that the market ‘chop’ is not finished and could get worse before it gets better. For Monday we could see an up day, and Tuesday be the calm before the storm. I wouldn’t get too brave in either direction until we hear from the FED on Wednesday.

If history taught us anything (and I know: ‘This time is different’), when the NASDAQ first crossed the 5,000 mark – one year later it was down 59%. On November 2007 when the DOW first exceeded 14K – one year later it was down 47%. How quickly we forget the carnage that irrational exuberance can cause. Everyone looks at the DOW hovering around 18K and the NASDAQ around 5K and thinks that ‘all is well’. I can guarantee you that all is NOT well.

TIPS:

In the ‘Theory of Cycles’, March 6^th through March 9^th 2015 was a cycle, and mid-April 2015 is signaling another (much larger) cycle. Cycles can often pinpoint market tops and bottoms. The best-case bullish scenario is that we top out in the March 6-9 cycle, bottom out in the mid-April cycle, and then resume the uptrend. The worst-case bullish scenario is that we rally into the mid-April cycle, and then begin a multi-month (or longer) selling process. Either way, keep in mind that the game has changed, and volatility is here to stay.

The theme for this week is to: “Play the Chart that’s in front of you”. I’m currently watching:

- AAPL: Apple put out an official sell signal last week when it crossed below its 8 and 21-day moving averages. Watch it to the downside via Buying Puts or Selling Call Credit Spreads.

- TSLA: Tesla has been in STFR (Sell the f----g rally) mode since September when it hit its high of $300. Each time that it rallies back to resistance, simply Buy Puts or Sell Call Credit Spreads.

- IWM / RUT: In direct conflict with AAPL, this index is signaling both a daily and a weekly buy signal. Watch it to the upside to either Buy Calls or Sell Put Credit Spreads.

- USO: Crude Oil is presently sitting at $45 and moving lower. There is not much support in Crude Oil until $41.15. Therefore, on any rally in Crude Oil, Buy PUTS on USO.

- UUP: The dollar index is exploding higher while the Euro is getting trashed. This drives commodity prices lower in the U.S., and stock prices higher in Europe (with the DAX (the German Index) making new highs this week).

- PCLN & NFLX: In terms of some high-fliers that are rolling over and dying – look at PCLN, NFLX in order to Sell Call Credit Spreads.

- /GC = Gold: Watch the 1147.90 level in gold. If it breaks through that level, then either Buy DUST or Sell Call Credit Spreads on NUGT.

I’m currently holding:

- AMGN – BOUGHT APR Call Calendar: - APR 160 / + JUL 160. In the ideal world the APR Calls would close less than $160 leaving me pure profit on the July 160 calls.

- CELG – SOLD APR Put Credit Spread: -105 / +100

- CF – BOUGHT MAR - Put Butterfly: +295 / -290 / +280 … that will get interesting as CF approaches $290 this week,

- CP – SOLD MAR – Iron Condor: +170 / -175 to -200 / +210 … which should expire worthless this week,

- COST – BOUGHT APR – Call Debit Spread: +145 / -160

- HFC – SOLD MAR – Iron Condor: +36 / -37 to -45 / +46 … that should expire worthless this week,

- IBB – BOUGHT MAR – Call Butterfly: +345 / -350 / +360 … that will get interesting as IBB approaches $345 this week,

- LL – SOLD APR – Put Credit Spread: -30 / +28,

- RH – BOUGHT MAY Call Calendar: - MAR 95 / MAY 95 … that increases the closer RH gets to $95,

- RUT – SOLD MAR – Iron Condor: +1130 / -1140 to -1260 / +1270 … that will become interesting to the upside if the Russell 2000 remains strong,

- HEDJ – BOUGHT MAR – Call Debit Spread: +63 / -66 – that I will cash in and renew for May – as it performs well with U.S. dollar strength, and

- SYK – SOLD APR – Put Credit Spread: -87.5 / +85.

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, March 8, 2015

This Week in Barrons - 3-8-2015

This Week in Barrons – 3-8-2015:

“Send Hookers, Drugs and Money … into the GDP”… pseudo-Aerosmith

Thoughts:

Dear Ms. Yellen:

I’m reminded of a conversation Sir Winston Churchill had with a socialite many years ago:

Churchill: "Madam, would you sleep with me for five million pounds?"

Socialite: "My goodness, Mr. Churchill. Well, I suppose."

Churchill: "Would you sleep with me for five pounds?"

Socialite: "Mr. Churchill, what kind of woman do you think I am?"

Churchill: "Madam, we've already established that. Now we are simply haggling about price”

I think Mr. Churchill’s point was that everyone ‘prostitutes’ himself / herself for a price – the only question is: ‘At what price?’ You see, in 2013 virtually every nation decided to change their measurement of GDP (Gross Domestic Product) in order to make their individual countries look better. In the U.S. we have changed the rules to include: research and development, and artistic originals such as: books, movies, TV shows, music, photographs and greeting cards. However, countries in the EU went one-step further and decided to also include gambling, prostitution and illegal drugs into their GDP calculation(s). There are distinct differences between calculating the effects on an economy from an R&D effort and it’s subsequent spin off income, versus the selling of humans, heroin, cocaine, and crystal meth. The first thing that comes to mind is: How exactly is all of that illegal activity being accurately measured? Given it’s ‘illegal’, the effects and business relationships aren’t exactly traceable via normal invoices – not to mention how to calculate the impact on a country’s Gross National Product.

The Organization for Economic Cooperation and Development (OECD) concluded that the nefarious transactions from hookers, drugs and gambling added a full 1% to Italy's GDP and 0.9% to Spain’s GDP. Thus far (in the U.S.) our changes to the GDP equation have resulted in an increase of between 2 and 3%. Yet despite this obvious slight of hand, our GDP readings have been dismal at best. This week we learned that our reading from the 4th quarter of 2014 was revised downward from 5% to its current 2.2%. Which means that under 2013 calculations, our 4^th Quarter GDP would have been less than 0. That’s right – ZERO growth for all of 2014.

Also, this week the Atlanta FED and J.P. Morgan came out with 1.2% as their preliminary estimate for 1^st Quarter 2015 GDP growth. That means without including all of the ‘art’ and ‘tv re-runs’ our economy would be performing in the negative 1% range. So it looks like (from where I’m standing) we need to include Hookers, illegal Drugs, and Gambling in our GDP calculation in order to remain in positive territory.

Ms. Yellen, is it a sign of strength when:

- After 6 years of QE and zero interest rates, we still need to creatively modify our economic reporting?

- With over 100M people NOT being counted in the labor force, can we really say that the unemployment rate is 5.5%?

- Our ‘real’ 2014 GDP was 0%, and our ‘real’ 1^st Qtr. 2015 GDP is negative?

- The individuals running hedge funds are under-performing the markets, because THEY are afraid of taking too much market risk?

- We've seen 22 global interest rate cuts in two months, and 2 nations are offering negative rates?

It’s interesting to me that without the ‘revised’ GDP calculation, our nation would be showing two quarters of NEGATIVE GDP growth – which (under normal circumstances) would denote a recession. Therefore Ms. Yellen, I will NOT be surprised when you propose that Hookers, illegal Drugs and Gambling be included in our upcoming GDP calculations.

The Market:

Factually this week we learned:

- In February, we created 295k new jobs, and the unemployment rate fell to 5.5%, with part-time work and bartending leading the way.

- In 2015, $16.8B has come out of stock market ETF’s (Exchange Traded Funds). This is the largest outflow of capital from ETF’s since 2000.

- In 2015, there have been over 103k announced work related layoffs.

- For only the 2^nd time in 40 years, our 4^th Quarter GDP has fallen. It fell from a previously reported 5% to a newly revised 2.2%.

- The dollar hit an 11-year high against the euro; therefore, hurting international demand,

- The Institute for Supply Management reported that the manufacturing activity for February declined, and that U.S. factory orders dropped for the 6th month in a row.

- QE in Europe will begin officially on March 9^th.

Friday’s Job’s Report showed that we created 295k new jobs last month, and the unemployment rate fell to 5.5%. This number just ‘smells bad’ because:

- Companies are cutting their forward earnings estimates,

- This winter has been particularly bad on the Mid-Atlantic and Northeast,

- Initial jobless claims are rising, and

- Decreasing oil prices have shut down or suspended many operations.

The banksters are talking about the FED’s March 18^th meeting suggesting an interest rate increase in June. That bothers corporations because they are using these 0% interest rates to borrow money, sell debt and buy-back their own stock. This does several things. First, it lowers the amount of stock in the public ‘float’ – which effectively pushes the stock price higher. Secondly, it gives the insiders of the company huge ‘bonuses’ as their income is often laced together with stock incentives. Stock buy-backs are now the single best way of manipulating a company’s stock price, and making a company’s poor performance look considerably better. According to Sundial Capital Research (as pictured below), technology companies have been buying back stock in record amounts. But at the same time, insiders, directors and senior executives (of those same technology companies) have been selling their own shares at the heaviest pace in the last eight years.

On Friday the 2090 level on the S&P did not hold as we ended the day at 2071. The next level of support for the S&P is around 2062 – the 50-day moving average. I suspect we hold this level, otherwise we could see a drop all the way into 2017 before the next soft support takes hold. The bottom line is simply that this bull market is a little ‘long in the tooth’. The FED is acting tough despite 38 out of 40 economic reports missing their estimates to the downside. The world is a more dangerous place (in many respects) than it has been in many years. I’m NOT jumping in here and ‘buying the dip’ – at least not yet. Patience is a key.

TIPS:

On Friday:

- The New York Stock Exchange (NYSE) produced a record number of stocks with new low prices for the year (2,234). Taking into account all of the indices, Friday saw a record 4,500+ new lows set on fairly significant volume. This is a red flag for this coming week.

- We had our first close in the DOW below the 21-Day moving average. I watch for a 2nd close below that same average, and if/when that happens it tells me to start ‘Selling the Rally' rather than ‘Buying the Dip’.

- The NASDAQ was the only major index that held it’s 21-day moving average. I find that when indices and currencies begin to experience greater than 1% moves to the downside, then investors begin to panic – dump everything – and ask questions later.

- Money was flowing OUT of both the Bond and the Stock markets. The common wisdom is that when money comes out of bonds – it must go into stocks. But currently money is moving out of stocks and bonds into cash.

- If the price of oil continues lower, it will drag the S&P index down with it.

- It’s been my experience that ‘hope’ and the stock market do not make good bedfellows. Therefore, because the S&P has broken its 21-Day Moving Average, and because BONDS were also down – I sold virtually all of my directional long positions on Friday.

I believe that we are about to enter a period of dramatically increased volatility. If you have positions that are ‘larger than normal’ - then best ‘batten down the hatches’ and either exit, or be ready to defend strong moves one-way or the other. I believe that there is a massive economic reset coming, and there is nothing that can stop it. We are in a collective ‘get all you can – while you can’ time period with the only question is timing. Thus far the FED has been a master of ‘pulling a rabbit out of a hat’. My fear (however) is that they are running out of rabbits. I have a sneaking suspicion that our ‘empty hat’ is going to come in the September / October 2015 time frame when:

- The IMF is going to rebalance its currency SDR’s,

- The Greeks could logically choose to exit the EU,

- Our FED could raise rates, and

- NATO could decide it’s time to move closer to the Russian borders.