This Week in Barrons – 1-10-2016:
Thoughts:
“Let Me Entertain You”
= https://www.youtube.com/watch?v=HSJfkLXaayg
Dear. Ms. Yellen:
I’m reminded
of what Jimmy Cayne (previous CEO of Bear Sterns) once said about Wayne Angell
(his Chief Economist): “Economists are
right only 35 to 40% of the time. I think that he is mostly entertainment, but
he probably doesn't think so. Wayne travels a lot, visits people, after
all – he is an entertainer."
Mr. Cayne
didn’t even pay lip service to the idea that Bear Sterns' clients were entitled
to the firms best efforts based upon their superior research. For Mr. Cayne, the goal was simply to be
entertaining enough to make sales. So as we dive into Wall Street's
forecasts and predictions, remember that many on Wall Street are only there to
entertain you, and get you to part company with your money.
To start the week, Mr. Richard
Fisher (former head of the Dallas FED & former FED Co-Chair) came on CNBC this
week and said: "We (the FED) front-loaded an enormous market
rally from 2009 onward, in order to create the wealth effect. For too many years everyone wanted the FED to lift all boats. Now, that's over and people are going to have
to go back to fundamental analysis. The kind
of work that used to be done – looking at individual companies to see if a
company (on it's own) can grow its bottom line and increase shareholder value.”
Ms.
Yellen, what I’m hearing from Mr. Fisher
is that the FED can only fuel spending at a pace faster than private sector
growth for so long. Eventually either
you top out, or private sector growth catches up and continues to fund the
spending spree. Of course the third
option is the FED injects yet another round of uber-stimulus (QE, ZIRP, TALF,
Operation Twist, etc.). After all, the
rest of the world is accelerating their ‘stimulus to prosperity’ policy – why
not the U.S? Given you’re a Keynesian
and this administration strongly dislikes the pain of financial responsibility –
I’m assuming that your next move is ‘Stimulus 5’ – yes?
But recently I noticed
that a law was passed outlawing the FED from saving a failing bank. Excuse me, but there are $700 Trillion in
derivatives floating around out there.
That means that the next banking collapse is Uncle Sam's problem. With Uncle Sam being broke, that leaves the bank
depositors on the hook for the collapse. Oops, (I forgot) due to another law, the
minute I deposit money into a bank – it ceases to be MY money. It’s all beginning to make sense to me
now. Under the new law, when a bank
fails – the depositors will lose all of their money and will become completely
dependent upon Uncle Sam for handouts.
Got it!
Lastly Ms. Yellen, I’m
beginning to hear talk of a potential U.S. recession in 2016. A key recessionary indicator is U.S. trucking
tonnage, and that has been down 3 out of the last 4 months – and down 6 out of
the last 11 months. The last time that
we saw this significant of a fall off was during the 2008-2009 recession. Combine this with ‘mixed’ holiday sales,
stagnant wage growth, and a low employment participation rate – it doesn’t bode
well for private sector growth. You do
know that 2016 is a Presidential election year, and a recession would all but
guarantee a change in governmental leadership – yes? And often what comes with a change in
governmental leadership is a change in FED leadership – yes? I’m thinking that you are hoping for stagnant
economic growth, and betting that market volatility is more than the long-term
investor can stomach. I have to hand it
to you; I haven’t seen this much ‘market entertainment’ in years. If that was your goal for starting 2016 – I
can’t wait to see how November plays out.
The Market
This week we saw the
December Jobs Report offer some good news in a sea of weak economic data. It seems that in December, we created
290,000+ jobs, when only 200,000 were expected.
Now December also gave us weak holiday sales in many sectors, sharp manufacturing
declines, reduced shipping tonnage, fewer exports (widening the trade deficit),
contracting corporate profit growth, and 4th quarter earnings that could be significantly
weaker than anticipated.
What I find silly is that the
December Jobs Report is already fueling ‘FED rate hike’ talks. Talks like this will only drive more
volatility into the market. And as the
report continues to sink in, and talks of the next FED rate hike grow louder –
the market will accept a rate hike as being bad news. The market really wants ZIRP (Zero Interest
Rate Policy) so that corporations can continue to leverage and push up asset
prices. Higher interest rates translate
to:
-
Higher mortgage
rates (stalling the housing market),
-
Higher borrowing
costs (cutting spending),
-
Higher carrying
costs (reducing leverage in the market), and
-
Declining bonds so
yields can rise (increasing savings).
All of the above make it
more difficult for the market to rally.
This week, China proved
that they do not understand the technology, timing, and/or algorithms
surrounding the use of market circuit breakers.
2 days this past week, Chinese trading was suspended due to circuit
breakers tripping within an hour of their market’s open. Presumably, they have suspended circuit
breakers completely (which is not the right answer either), but we will see how
their markets react next week.
Are we ever going to go
back to the days when the ‘average, hard-working person’ can live their life in
peace, be kind to their friends and neighbors, raise their 2 kids and a dog,
buy the picket fence – and just enjoy life?
How is J.Q. Public ever going to believe that everyone is NOT out to get
him? After seeing the movie “The Big
Short” (which I highly recommend), he now realizes that not only is the market
‘rigged’, but the Big Banks and the FED both ‘swindled’ him. This week the Nevsky Capital hedge fund
closed shop – not because they bet the farm on something that didn't work, but
rather in their words: “Data releases have become much less
transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever-increasing
importance of China and India. China is the world's second largest economy, but
already much larger than the US in a broad swathe of sectors. India will be the world's third largest
economy within a decade. Unfortunately …
the most important data they produce is simply not credible. This
obfuscation and distortion of data, whether deliberate or inadvertent, makes it
increasingly difficult to forecast macro and hence micro as well, for an ever
growing share of our investment universe.
The unintended consequences of new regulations have
given rise to falling equity market volumes, and a dramatic rise in individual stock volatility. To
mix metaphors: butterflies flapping their wings now regularly create hurricanes
that stop out fundamentally driven investors who cannot remain solvent longer
than the market can remain irrational. Less disclosure means more risk, and
instant downside risk on both longs and shorts has become immeasurably larger.
In summary, all of the above factors now mean that it
is more difficult than ever before for us to accurately forecast macroeconomic
and corporate variables. This has made
what we enjoy most - the thrill of analyzing economic data releases and company
accounts - no longer enjoyable. We are
confident our process will eventually work again - for the laws of economics
will never be repealed - but for now they are suspended and may be for some
time; an indefinite period involving indeterminate levels of risk during which
we think it would be wrong for us to be the stewards of your money.”
Bottom line – Nevsky
Capital is telling the world that the market is rigged, manipulated and
controlled.
By taking a ‘hawkish’
stance on raising interest rates, the Fed is playing a dangerous game. In 2015, rate hike expectations drove the
dollar higher, and created disinflation. China (after last weeks currency devaluations
and a stock market plunge) has become public enemy number one. In reaction, our market has peeled off an
incredible 158 S&P points and 1,404 DOW points in just 7 sessions. Right now we're in ‘Correction Mode’, but
eventually we are going to be in full on ‘Crash Mode’.
‘Crash Mode’ will happen
when everyone figures out that the FED is no longer going to rush in and save
the market. I do not think that the FED
will take back its rate hike, but there will some form of snap back rally. Look at a chart of August 2015. Following China’s first 4% currency devaluation,
we plunged 1,000 points in 5 days, but then had a 2-day, 990-point bounce. I’m looking for something similar. My only question is sustainability.
I think that it is written
in stone that we're going to test 1867 on the S&P. We might bounce and wiggle first, but
eventually that level gets tested. If it
holds, we'll trade sideways and slightly higher for a while. If it doesn't, then a full on ‘Crash Mode’ is
upon us, and we may not stop until a full 25% correction has been put in place.
The market tried to bounce
on Tuesday, but managed only a slightly green day. It tried again on Friday morning, quickly
gaining 150 points before rolling over once again. One of these bounces will stick. If nothing goofy happens over the weekend,
Monday may be the day – or it may show up as a ‘V’ style rescue. The bottom line is that unless you are a
skilled day-trader, you do NOT want to be holding anything long or short in
this mess. If you're a position trader, I
think it would be a big mistake to ‘buy this dip’ in hopes of some ‘run to
glory’.
The world is in turmoil. Gold is a great place to be. But if you can't stomach the gyrations of
gold, then go to cash. Earnings season
starts this week, and that will add even more volatility to the mix. If you're going to trade, do it in big liquid instruments
like the SPY. Right now, ‘Return OF’
your money is much more important than a ‘Return ON’ your money.
Tips:
Support &
Resistance
INDU 16,346 - I’m expecting consolidation around the 16,400 level,
and if we continue through that – then I think the low is 16,000.
NDX 4270 - I’m looking for some sloppy consolidation
around 4200 – 4400. Apple has been an
unexpected drag, but speculative buyers came in on Friday. This could give the index support that could rollover
into the Dow Jones.
SPX 1922 - The range here is between 1920 and 1980. This week could bring ‘knee-jerk’ sell-offs
and rallies. The next level of support
is 1901. I’m hearing people talk about
1750 and 1800, but I don’t think we get there.
I think we will see consolidation in this area – unless some other shoe
drops.
RUT 1046 - My one concern about the general market order flow is seeing the Russell
index smash through its 1080 level. We
really need to see this index get back above 1080 and close there with some
strength. If we can get up into the 1080
area with some volume – it could confirm some support or at least bring consolidation
in here.
I’m looking at:
-
TSLA (211) – now
that it has broken through 213, I’m looking for more downside,
-
DECK (44) –
below 45, it appears to be heading lower,
-
CRM (73) – is
sitting on it’s 200-day moving average – if it holds – selling a Put Credit
Spread would be the way to go,
-
DIS (99) –
around $98 Disney gets interesting again to the upside,
-
AAPL (97) – look
for the bounce to continue – before shorting this again,
-
FB (97) – look
for a bounce into 99, before shorting it again,
-
AMZN (608) – looking
for more downside into 601, and
-
**UA (75) -
looking at selling the $87 Jan5 Calls / and buying the $90 Feb Calls for a
credit of 2 cents – so virtually no downside risk in this trade!
I am:
-
Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
-
Long an oil supplier: REN @ $0.56,
-
Sold RH – Jan – Call Credit Spread – 80 / 85, 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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