RF's Financial News

Sunday, January 3, 2016

This Week in Barrons - 1-3-2016

This Week in Barrons – 1-3-2016:

Thoughts:

“Yippee Ki Yay – Mother-F!#$#@” – Bruce Willis in the movie Die Hard

Happy New Year:

I can almost guarantee that if you liked 2015 – you’re going to love 2016. Here are some sobering thoughts by a very smart man – Dr. Paul Craig Roberts. Dr. Roberts was Assistant Secretary of the Treasury for Economic Policy under President Ronald Reagan, and associate editor of the Wall Street Journal. He believes that as long as the European governments (especially Germany and the UK) continue to act as nothing more than an extension of Washington, the prospect of World War III / Armageddon will continue to rise. But let’s take a step back.

In 1991, the collapse of the Soviet Union gave birth to Neo-conservatism. Neo-conservatism generally states that the U.S. is the ONLY superpower that can act without restraint anywhere in the world. In 1992, Undersecretary Paul Wolfowitz wrote the Wolfowitz Doctrine. It states that our first objective is to prevent the re-emergence of any new rival that poses a threat to the U.S. In 1998 (three years prior to 9/11), the Neo-conservatives sent a letter to President Clinton calling for the removal of Saddam Hussein from power, and for removing seven other governments from power in the next five years. http://www.globalresearch.ca/we-re-going-to-take-out-7-countries-in-5-years-iraq-syria-lebanon-libya-somalia-sudan-iran/5166. Neo-conservatives view the events of September 11, 2001, as 'the New Pearl Harbor’ – which was necessary in order to begin the conquest of the Middle East. Since 9/11, Washington has destroyed (in whole or part) eight countries – and now confronts Russia both in Syria and Ukraine.

Russia's president Vladimir Putin has been demonized by Neo-conservatives. Even Hillary Clinton has declared him to be ‘the New Hitler.' Putin's responsible behavior, however, has been misinterpreted by Neo-conservatives as a sign of weakness and fear. Putin has made it clear that Russia will not give in. By example, on September 28, 2015 (at the 70th anniversary of the United Nations) Putin said that Russia would no longer tolerate the state of affairs in the world. Two days later Putin took command of the war against ISIS in Syria.

Dr. Roberts believes that nuclear war is coming, and can only be avoided in two instances:

- One is for Russia and China to surrender and accept Washington's leadership.

- The other way is for an independent leader in Germany, the UK, or France to rise to office and withdraw their country from NATO.

That would begin a stampede to leave NATO. NATO is Washington's primary tool for creating a conflict with Russia, and is (therefore) the most dangerous force on earth. If NATO continues to exist, NATO together with the Neo-conservative ideology of American leadership will make nuclear war inevitable.

Well, Yippee Ki Yay, and on with my New Year’s predictions.

The Market:

2015 was a tough year. 267 Hedge funds went under. Some of the biggest investors on the planet lost money. The damage was everywhere:

- People that purchased the initial dip in oil thinking that it was going to rebound – got creamed.

- People that bought the small caps in May and June looking for new highs – got slammed.

- People thinking that the financials would power to new highs – were dead wrong.

- Except for Facebook, Amazon, Google, and Netflix – the number of winners was few and far between.

In 2016, I see a whole lot more trouble. If the best the market could do in 2015 was to lose 1% (despite the umpteen trillions of dollars being pumped into it globally by the Central banks); it tells me that the ‘going’ is about to get even tougher.

2016 Predictions:

- Interest Rates: My prediction comes down to whether or not the FED will continue to drive the market and the headlines, or whether they will change policy. The FED will always continue to be the ‘buyer of last resort’ – supporting bonds and inflating stock prices. In 2016, I don’t see any significant change in interest rates or FED policy.

- Commodities: Whether it was oil, corn, gold or soybeans, 2015 put tremendous pressure on commodities. The primary driver for this pressure has been the strong dollar. I believe that we could see the dollar spike higher at the beginning of the year. We could see the DXY (the dollar index) break above 100 again; however, unless the FED takes a significant ‘hawkish’ position, I think we could see the dollar begin to collapse. And if the DXY cannot hold support at 94, we could see the dollar fall into the 80's before support is found. If the dollar drops into the 80’s, commodities will see a significant rally in 2016.

- Inflation: If there is a drop in the dollar, commodities will rally, and inflation will kick in. We have been in a disinflationary environment for a while. But why? After all, the FED’s easy money policy is trying to spur inflation by pushing bond prices higher, lowering rates, and increasing the money supply. But the reality is that outside forces are the primary cause for the disinflation that we are experiencing.

o Today the majority of our goods are imported.

o We have a trade deficit as we continue to consume far more than we export.

o Old economic theories are no longer working. The proof is that after printing trillions of dollars, buying trillions of bonds, and keeping rates at zero – we are not seeing any inflation, actually the opposite.

o Currently all of our trading partners are devaluing their currencies by cutting rates and increasing their own versions of a QE type of stimulus. But in 2015, we started to strengthen our own currency with a 25bps rate hike. I’m counting on this ‘perception’ and the reality of a cheaper dollar to drive inflation higher in 2016.

- - Stocks: The ‘Unicorn’ (over-valued) companies take me back to the dot.com era. I think we will see more consolidation, and fewer IPOs in 2016. With Apple closing DOWN on the year, I think that the tech sector will continue to be mixed, and strength will come from disruptors as well as from Asia. Environmental disruptors will also gain traction. The world has embraced the global warming story, and that is driving nations to change environmental policies and consumers are becoming more conscious with their purchasing. We will see more battery, green, and other environmentally conscious companies rise up. These environmental companies could be take-over targets by oil companies (and companies like GE) that are trying to expand into this growing space. The general market will have a difficult year in 2016. I believe that broad based index ETFs or index tracking mutual funds will most likely under perform a more sector driven economy and market.

- - The FED: The dollar rally is driving deflation, and THAT is the greatest fear of the FED. Hopefully the rate hike has quieted the media, and they can now turn back to their easy money policies and curb the dollar rally.

- - CONCLUSION: I think that the big story will be the U.S. dollar. It will not get much attention, but will drive the markets. If the dollar index holds in the 95 – 100 range through 2016 it will be a non-story. However, I don’t think it will stay there and if we crack below 94 we could see a spike in inflation, which will drive commodities higher. The FED’s wish of inflation could come fast and true which would be un-welcomed. The velocity of money continues to decline as money continues to pile up higher behind the dam. When inflation comes, it will be based upon what happens with the dollar index and the velocity of money – those two will be the prime indicators. The question is NOT whether it comes, but how fast it comes when it does.

Tips:

Last week the Chicago Purchasing Manager’s Index (PMI) came in well below 50 at 42.9. Inside the report, new orders and backlogs both crashed. It was the worst Chicago PMI report since 2009. The latest Dallas FED Report confirmed those low industrial numbers by reporting a -20 reading.

To quote Michael Burry (the hedge-fund manager known for recognizing the subprime crisis and who is portrayed in the new movie “The Big Short): “It seems the world is headed toward negative, real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy.”

INDU 17,425: For next week I’m looking to potentially visit the 17,200 area.

NDX 4,593: The tech heavy index has held up well, despite some volatility. The beginning of the year could bring a test of 4,500.

SPX 2,044: I don’t see a strong rally in the near term, and we could visit 2,000 in the very short term.

RUT 1,136: The Russell finished the year weak. 1,120 is the support that we need to watch if the New Year decline continues.

I am:

- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,

- Long an oil supplier: REN @ $0.56,

- Sold RH – Jan – Put Credit Spread – 70 / 65, and

- Sold SPX – Mar – Call Credit Spread – 2150 / 2155.

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, December 27, 2015

This Week in Barrons - 12-27-2015

This Week in Barrons – 12-27-2015:

Thoughts:

“The more violent the storm, the quicker it passes.” … Paulo Coelho

Dear Ms. Yellen:

I hope that you and your family are having a happy holiday season. I wanted your thoughts on a discussion that SF and I were having last week on GF’s ‘The Exporting Crisis.’ It seems many of the top exporting nations are worried about the currency ‘race to the bottom’. Countries like South Korea and Germany are extremely efficient exporters – to the tune of exporting about half of their GDP. And at one time this ‘export’ ability was an asset, but now customers are holding exporters hostage. You’ve no doubt heard the saying: “If I owe you $1 – it’s MY problem, if I owe you $10m – it’s YOUR problem.” Currently customer problems have become the exporting country’s problems – because an exporting country’s economic, political, and social lives depend upon their ability to continue to export.

Recently, the lack of appetite for Chinese goods (specifically in the U.S.) became an exporting crisis for China. That, in turn, created an exporting crisis for those fueling China’s economic growth, including oil and other raw material exporters. China had assumed that the U.S. and European economies would recover, and would resume importing Chinese goods. South Korea assumed that China would resume prior levels of production, and would resume importing their goods. Even now, the world is assuming that the collapse of oil prices and of secondary exporters like South Korea will recover and return to previous levels.

Putting these assumptions aside, there are additional, critical exporting and currency related issues. Germany (for example) is the world’s fourth largest economy, exporting just under 50% of its GDP.

Germany needs to maintain the European free trade zone at all cost, and is therefore leading the Euro lower in the ‘currency devaluation race’. Germany is the most effective economy in Europe, and also the most insecure. It is incredibly vulnerable to any reduced demand for its products. Its prosperity and full employment depend upon its export system. However in a ‘no or low growth’ world, the appetite for exports has become less than robust. There are enormous pressures on German exporters to seek new markets. Now it becomes even clearer why the Eurozone/Germany needs to continue to devalue its currency. A cheaper Euro allows German suppliers to be the ‘low cost provider’ and to more easily penetrate new markets.

In contrast, the U.S. only exports 13.5% of its GDP, but is the producer of almost one-fourth of the world’s GDP. The U.S. has relatively high domestic consumption, and therefore relatively limited exposure to foreign dysfunctions.

It comes down to the exporting economies being extremely vulnerable to their existing customers during ‘no or low growth’ environments. Europe and Asia (due to their natural ‘exporting’ nature) are currently in chaos. So insulating ourselves from them economically via an interest rate hike was a good thing. Also the ‘export-based economies’ are beginning to experience lower-priced competition from East African countries and from some neglected parts of Asia. These countries are developing production capabilities in garments and cell phones, and are proving to be worthy competitors to the Europeans and Asians.

I worry that we are entering an era of European and Asian economic and social instability – where no amount of QE or currency devaluation can save their economies from real export competition and reduced consumption. History tells us that the only solution for a downturn in an export-based economy – is war. The only solace is: “The more violent the storm, the quicker it passes.”

The Market...

Factually:

- Existing home sales fell 10.5% in November – making it (arguably) the largest November drop ever.

- If you chart the S&P for the past 6 months, you will see is a series of lower highs attained on various bounces. After the August lows and then the September retest of those lows, we charged higher – running out of steam at 2109. Then we pulled back, and another push higher to 2102. Then we faded again, followed by another run-up to 2091. Then we plunged, only to be followed by a snap back rally to 2073. Each high number has come up slightly shy of the previous one: 2109 to 2102 to 2091 to 2073. That's not a tremendously bullish omen.

We just came through a powerful 3-day bounce, followed by a pause on Thursday. So what’s next? We are in the time slot for the ‘Santa Claus Rally’, and many are hopeful that the next 8 trading days will bring us back to the year's highs. It certainly could. After all, markets no longer require fundamentals to go higher.

We're coming into the last 4 trading days of the year, and two out of my three predictions have come true.

1. China was accepted into the IMF's SDR reserve currency basket.

2. The FED did NOT do any more QE, but did increase rates.

3. And, in May I said that the market had ‘topped’ and without any new stimulus or QE, we would not see new highs this year. So far so good.

To see new highs by yearend, the S&P needs another 70+ points and the DOW needs 760 points. And even for these banksters, 760 points in 4 sessions is a stretch.

For 2016, I’m hearing rumblings that Central Banks would like to do a ‘Helicopter Drop’. What’s a ‘Helicopter Drop’? The idea is that when all else fails to stimulate an economy, Central Banks will find ways to get cash directly into consumers pockets – bypassing the idea of ‘trickle down’. For example, what if you woke up Monday morning to a ‘Treasury Tax Rebate’ where $10,000 dollars had been wired into everyone’s bank account. Some might save it, but the U.S. (being a consumption society) would see most people busting down doors to get to the malls and car dealers as quickly as possible. Instantly ‘Business would be Boomin’, and for a short period of time the surge in the economy would be epic.

This is exactly what's being talked about as a serious suggestion for the Eurozone, and eventually the U.S. Remember, exporters need consumers to survive. But can you imagine the idiocy of such a decision? First of all, the money would be printed out of thin air, and therefore the value of that currency would be crashing. Secondly, all of that printed money would end up on some ledger as being more debt that could NEVER be repaid. And finally, think of the shortsighted nature of that decision. Just like the trillions in QE over the past 6 years has ‘drawn forward’ demand, and now that QE is dwindling – the demand is drying up along with it. The same thing would happen with a ‘Helicopter Drop’. Uncle Sam would give every citizen $10K to spend. Millions would rush out and buy every gadget they ever wanted. The gadget suppliers would ramp up production to meet demand. The suppliers of the raw materials to make the gadgets would be hiring, and everyone would be happy – until the last person spends his $10K.

Then instantly demand goes back to where it was BEFORE the $10K hit everyone's pockets. The effect would be over. All those extra miners, refiners, assemblers, trains etc. would sit idle (as they are now). Refresh my memory, but wasn’t this what QE was supposed to do – jump-start a slowing economy? I fail to comprehend the idea that doing MORE of something that FAILED is going to give us a better outcome. From my view (in the cheap seats), we would just fail BIGGER. But that's the very idea that Draghi is trying to get accepted by other Central Banks and our FED – over in the Eurozone.

It’s too early for my 2016 outlook; but you can bet that it is going to be a fairly ‘ugly’ read. Big changes are coming too quickly for economies to pro-act. For example, consider the job market. Just two years ago petro-engineers were in high demand – writing their own paychecks. The shale oil companies were competing against each other for their services. Now, many are laid off, and more will be hitting the unemployment lines as sub $40 oil will put a halt to many of those operations. With that in mind, please be careful out there. It's a very strange time in the markets, in politics, and in the world. Try and be safe.

Tips:

I am looking at:

- Allergan (AGN) has a deal with Pfizer (PFE) that is heating up. AGN is potentially range bound to the upside – so we may be able to do a Diagonal or a Broken-Wing Butterfly.

- Restoration Hardware (RH) is setting up nicely to the upside for a January or February Diagonal or Broken-Wing Butterfly.

- Other names (like the above) that are setting up to the upside are: IBB, AAPL, CRM, COST, LMT and NKE.

- Boston Beer (SAM) for a JAN, 185 / 190 to 220 / 230 Iron Condor,

- Polaris (PII) for a JAN, 75 / 80 to 95 / 100 Iron Condor, and

- Cracker Barrel (CBRL) for a JAN, 115 / 120 Put Credit Spread.