RF's Financial News

Sunday, February 7, 2016

This Week in Barrons - 2-7-2016

This Week in Barrons – 2-7-2016:

Thoughts:

Dear. Ms. Yellen:

We’ve been at this party for 7 years. The S&P 500 has rallied 220% (12% annualized), and yes there were times when some stocks/sectors exploded to the upside while others crashed and burned – but all in all – it’s been a great party. I wanted to start off by saying thank you Ms. Yellen, but now I think something is amiss.

My theory goes something like this: In the depths of the Great Recession the Central Bankers decided that massive injections of liquidity (in the form of low interest rates and outright purchases of bonds (Quantitative Easing)) would have the affect of pushing investors out of low yielding investments, and back into more risky assets. The corresponding increase in wealth from the already wealthy risk takers – would then trickle down into the real economy.

But often times perception does not go hand-in-hand with reality. The rich did get richer, but instead of investing their new wealth into productive capital – they choose to invest it in other (non-leverage able) assets like real estate, art, and collectables. Other investors chose ‘outright’ not to participate because the thought of putting all of their hard-earned savings into assets that had experienced two 50% corrections in the last 15 years – didn’t leave them wanting for more.

I think that Central Bankers believe that there is an interest rate SO LOW that it will ultimately result in explosive economic growth. I think they believe that if they spike the punch bowl just one more time, the partygoers will explode with rapture. Unfortunately there is NO proof that zero (or negative) interest rates are spurring economic growth. Japan has had zero interest rates for decades and their economic growth hovers around zero. The Eurozone continues to flirt with sub-one percent growth, and the U.S. (after trillions in monetary stimulus) has had economic growth of only 2%. And therefore, in order to gain more votes (and income), our government officials continuously revisit the idea of increasing the taxes on the top 1% wage earners as their ‘go to’ method of political acceptance.

And after listening to more Hillary and Bernie than I care to digest this week, SF and I dove into the numbers surrounding increasing taxes on the top 1%. Factually:

- All of the136 million U.S. taxpayers earn $9 trillion in income, and pay $1.1 trillion in income taxes.

- The top 50% of all taxpayers pay 97% of all income taxes, and the top 1% already pay 38% of all income taxes.

But let’s think of this a different way:

- In 2016, the U.S. needs to come up with $4T to fund its budget. Let’s look at taking more from the top 1%’ers – and see how long those different chunks of income would keep our government running. For example:

- the U.S. TOOK ALL of the profits from ALL of the Fortune 500 companies – our government would be funded for an additional 60 days – through the end of February.

- If the U.S. TOOK ALL of the salaries from anyone making more than $250,000 per year – our government would be funded through July 10^th.

- If the U.S. TOOK ALL of the property in Beverly Hills and sold it at market value – we could stay solvent through July 29^th.

- If the U.S. KILLED and TOOK ALL the money from all of the billionaires, the government would be alive through November 10^th.

- If the U.S. TOOK ALL of the Christmas spending directly into its coffers – that would fund the government until December 25^th – Merry Christmas.

- And if the U.S. eliminated all foreign aid, we would make it until December 30^th.

- That would leave every man, woman and child to contribute the remaining $44 per person to take us through the end of 2016.

- BUT – What Happens NEXT YEAR after we’ve effectively killed the ‘golden goose.’ After all:

o We’ve taken all the profits, assets, holdings, salaries – every dime from the rich.

o We’ve bankrupt all of the Fortune 500 corporations.

o Any ideas on what’s left to TAX – so we can make it through 2017?

- Leave THAT up to the REPUBLICANS…Good answer – Good answer!

The Market:

While talking to a ‘hedge fund guy’ the other day, he asked me: “If you were managing a pension fund, how would you prudently earn 7.5% on $48 billion – knowing that the world’s Central Banks are moving toward negative rates?” The issue is that these large pension funds can't earn anywhere near their required returns, and therefore benefits to their pension holders are going to be reduced. The ‘hedgie’ went on to say: “Anyone showing you double digit returns is using crazy leverage and getting lucky. Sometimes you just have to accept the fact that there's no way to make money out there. There are times to reap and times to sow. This is not a reaping time, this is a crying time." Below, is a mapping of most of the investment alternatives against the Growth and Inflation Axis. It shows why ‘cash’ and ‘precious metals’ are becoming increasingly more interesting.

Factually:

- U.S. debt reached a new $19 Trillion high this week.

- Global employment in the financial community continues to be reduced. Over half a million jobs have been eliminated across the industry since 2008, and it's likely to get worse this year as revenues stagnate.

- January, year-over-year layoffs jumped an incredible 42%.

- Since January 1, we've only had 3 days where the market didn't do a triple digit swing. In fact in that same period, the S&P has risen three days in a row only once.

- This past week there were numerous rumors having Russia and OPEC meeting to consider production cuts. Naturally all of the rumors were untrue, and solely designed to keep the stock market afloat.

- Unfortunately, U.S. crude oil inventory supplies are above 500M barrels for the 1^st time since 1930.

- And in a twist reminiscent of the housing bubble, in 43% of home refinancings – homeowners are taking (on average) $60,000 of ‘cash out’ of their homes just to make ends meet.

Today’s bulls and bears are slashing furiously at each other. In one corner we have Wall Street and the Central Banks, who want asset prices to rise – so they can use those assets as collateral, and create more synthetic derivatives. In the other corner we are faced with the stark realization that the entire world is in recession, mired in debt, facing depression, and has more investors pulling their money out than putting their money in the market. As proof positive of this volatility, during the past 10 sessions we have seen consistent triple digit intra-day moves in the indexes.

But what about the ‘big picture’ – Is the market going to move higher as CNBC suggests? In the short term, the market could move higher, like the surge we saw from September until November. But in the long term, we should be headed considerably lower. Currently, the S&P is battling with trying to keep its head above the August lows. We tested and held those lows in mid-January. On Jan 20^th we had a close at 1859. We then ran up to a short-term high of 1940 on Jan 29^th, only to end back down at 1880 on Friday. What a wild ride.

I think that if we close below 1859, the market is going to tumble quite a ways. But Friday’s close was above the 1872 support level. So the question is: Does Friday's close hold and we manufacture another bounce, or do we quickly re-test the lows? The question is made more complex by the ‘small to mid-sized’ investor having created a tremendous short position – over $4B. Often the market tries to confound and steal money from as many people as possible. If too many investors are long, the market usually dips, and vice-versa. Right now there are more outstanding shorts than there have been in a long time. This suggests that a short-term bounce higher could be in the works. That’s what the market tried back on January 29^th with that 400-point up day – but it fizzled out. The shorts did a lot of covering, but once they were ‘flat’ there was no more buying pressure, and without ‘new’ buyers the market stopped rising.

For 11 sessions we've been trading sideways between 1872 and 1950. At some point this box will fail. In the longer term, I believe that we ultimately fail the lows, and the market sees the 1725 area. But the next couple of weeks are a crapshoot.

Unless something happens with oil or in the Middle East, I'd expect a bit of a bounce on Monday. Unfortunately, since December the S&P has only been up 3 days in a row – once. So until a clear breakout or breakdown occurs, you have to either sit this one out, or be very nimble – as dips are being bought and rips are being sold.

TIPS:

- Equity market internals are deteriorating, while fixed income has stabilized.

- Global yields have accelerated downward.

- Corporations are embracing financial engineering and M&A instead of capital investments.

- Emerging markets are struggling with the Chinese slowdown and the commodity meltdown.

- Interest rates have become the #1 variable. Low inflation and low GDP growth means that interest rates may remain lower for longer. Currently deflationary fears are winning the inflation battle.

- Earnings are a function of lower global GDP growth. Earnings and revenue estimates are being revised downward with consensus being for a 3% decline in 2016.

- Investor psychology (not fundamentals) is driving P/E ratios lower – all the while nervousness is increasing. The (TINA) mantra: ‘There is No Alternative’ is beginning to wear thin during this sell-off.

- The only (TBD) ‘To Be Determined’ factor is Consumer Confidence.

I am:

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

- Long an oil supplier: REN @ $0.56,

- Long CSX, using a Covered Call to generate income,

- Sold COST – Feb – Put Credit Spread – 144 / 142,

- Sold RUT – Mar – Call Credit Spread – 1070 / 1075, and

- Sold SPX – Mar – Call Credit Spread – 2025 / 2030.

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>

Sunday, January 31, 2016

This Week in Barrons - 1-31-2016

This Week in Barrons – 1-31-2016:

Thoughts:

“I’m sorry my friend – you are toast!” … Lex Luther in BizarroWorld

Dear. Ms. Yellen:

Many years ago, a uber-comic book collector friend of mine told me of BizarroWorld. It’s a comic book place where all ‘Good was Bad’ and all ‘Bad was Good.’ Lately, I’m seeing more real life introductions of the ‘BizarroWorld’ behavior. For example:

- I recently read where the rules for transgenders playing sports in the Olympics are changing. It seems that ‘pre-operation’ men will be able to compete against females as long as they have acted like a woman and have taken hormone shots for a year. Really?

- Also, the mass influx of immigrants into Europe is causing a spike in crime, very little incarceration, and some major changes in thinking. A German report revealed that a record-breaking 38,000 ‘asylum seekers’ were accused of committing crimes in 2014. German authorities argue that their citizen's sudden interest in acquiring weapons has nothing to do with these statistics; however, there is an indisputable spike in migrant-associated rape, physical assault, stabbing, home invasion and burglary.

And since the focus in this country is about jobs, SF wrote to me pointing out that (over the next 10 years) it is estimated that robots will replace 50% of the American and British workforce. These machines are different, as they have the ability to replace both human hands and brains. Consider the replacement of:

- Cashiers – by a transaction oriented wearable device,

- Marketers – by robots that can mass-personalize every message,

- Customer Service Agents – by robots who can answer questions with the help of technology such as IBM’s Watson,

- Financial Middlemen – by robots who can execute ‘Blockchain’. Blockchain is Bitcoin’s computer program capable of automatically processing transactions and creating perfect, reliable digital records. This would replace most banking, insurance, escrow, and mortgage personnel.

- Journalists – the Associated Press already uses robots to produce hundreds of articles per week, and

- Lawyers (other than litigators) – where robots would perform all repeatable tasks.

These machines would be able to take over mid-skilled level jobs, leaving only the very low skilled or the very high skilled jobs for humans. Now, I understand that we in the U.S. have morphed away from being a manufacturing society into a service based model due to technology and inexpensive, off-shore labor. But the manufacturing countries of Germany and China are going to be greatly impacted.

And think of the upcoming college graduate – currently shouldered with (on average) $30,000 of tuition debt. One graph below shows the ‘underemployment rate’ for college graduates steadily increasing since 2002. The other shows wages for recent college graduates varying dramatically by discipline. The median early career wage for a computer engineer is $60,000 – with a corresponding ‘underemployment rate’ of 19%. While the median early career wage for a sociology major is $33,000 – with an ‘underemployment rate’ of 57%.

You can see BizarroWorld coming. A world over-run with robo cops, robot baristas, sociology majors who are forced to work asking ‘Do you want fries with that’, and not enough computer engineers to totally rethink all of the potential robotic, societal outcomes. I realize that BizarroWorld is strictly for comic book lovers. But I also realize that on more than one occasion – Art HAS imitated Life. To quote Lex Luther: “I’m sorry my friend, you are toast!”

The Market:

“You can choose to ignore the math, but you can’t avoid it!” As if to add insult to injury with BizarroWorld, on Friday, the Bank of Japan (mimicking Denmark, Sweden and the ECB) cut their interest rate to minus 0.1%. It also added that it is prepared to push the rate even lower if needed. Basically, the move is telling depositors that they will be ‘charged’ to keep their money with the Bank of Japan. Correspondingly the U.S. market jumped 400 points on Friday – on hopes that our FED would delay their upcoming interest rate hikes. Unfortunately, as much as I would love to embrace the headlines - the underlying currents of math and fundamentals move effortlessly forward and eventually the day will come when you just can’t ignore them anymore. Are we there yet, probably not. But it’s ONLY time we’re buying, as we are not changing any fundamental, economic realities.

This week:

- December durable goods orders fell over 5%,

- The Dallas FED reported a negative 34.6 growth number – even lower than last month’s negative 21,

- 4th quarter GDP fell to 0.7% (one tenth lower than expectations),

- Richard Fisher (the X-Dallas FED chair) is out saying that the inflation models the FED is focused on could be WRONG,

- California home prices fell for the 2^nd straight month,

- The Baltic Dry Index set another record low,

- Apple reported SLOWING sales growth,

- Two Italian banks were halted from trading due to a limit down exception,

- And other than Facebook’s earnings this past week – the best argument you can make thus far about earnings is one supporting ‘stagnation’ as opposed to ‘growth’.

Japan’s NIRP (Negative Interest Rate Policy) caught everyone by surprise – because just last week Japan’s Kuroda publicly stated (on Reuters) that they were not thinking about negative interest rates. The overall effect of course was that asset prices around the world jumped higher. But is cutting rates to negative, really a reason for stocks to move higher? Not really. Negative interest rates are completely unnatural, and will hurt the Japanese citizens. In fact, it will tend to create capital flight, as people refuse to put money in their local banks. AND it will cause the Yen to fall, and (after all) this is a currency war. Japan wants the Yen to fall to boost exports. That's fine, but what do you think China is going to do? The race to the bottom is in full bloom.

Make no mistake, the outcome of this is NOT good. All across the globe nations are desperate to do anything they can to avoid depression, and if that means abusing their currency to screw your neighbor – well, so be it. This is a desperation move where we don't know the ultimate results because it has never been done before. I suspect history will not look kindly upon it.

I often laugh, because any time I tell someone that I’m a ‘gold bug’ they laugh at me. They tell me that gold is a relic, it gives me no return, and it just sort of sits there. Yeah, well right now an ounce of gold returning zero has a better Return on Investment than bonds in Sweden, Denmark, Switzerland, Japan and the ECB. All of THEM charge you to own their lousy paper.

Anyway, Japan’s Yen did fall against other currencies. That makes their exports more attractive; however, it makes the dollar even stronger against the Yen. Wall Street is thinking that Japan's move will put our FED’s rate hike decisions on hold. In fact, some were thinking that the FED may take back their December increase.

Are they right? Don't bet on it. The MOST that will happen is that the FED may reduce the number of scheduled hikes. Originally they said there would be 4 rate hikes this year. I actually thought that 4 was a bit much – simply because it is an election year, and that takes the ‘end of the year’ out of the equation.

But nothing was going to stop Friday's rally as often the largest ‘up-days’ come in oversold bear markets. Friday was one of those vicious snap back rallies that take your breath away. This is NOT the start of a new leg higher in a bull market, but rather a powerful bounce in a market staring into the face of a Global recession. The only question is, how high does it go?

We ended Friday right at resistance on the S&P. For example, we closed on Jan 12 at 1938 – opened the next day at 1940 and fell like a rock. Last Friday we closed at 1940. We could test some intra day highs at 1950, but after that it would be a struggle to get to 1988. But I suspect Friday was a bit too much, and I'm looking for a bit of selling on Monday. If that happens, it will be very interesting to see how far the slide goes. If the slide can NOT hold the 1921 level, then I would expect to see us right back at 1900 on the S&P again soon.

Tips:

Notes:

- Remember: Congressman Hank Johnson (D) predicting that Guam would tip over if too many people were on it. https://youtu.be/cesSRfXqS1Q

- If you ONLY bought the S&P on the night before a two-day Fed meeting, and then sold it the next day after the Fed's decision – you would realize 60% of the S&P's upward movement for a whole year.

INDU 16,000  Selling pressure resumes, and a drop to 15,600 is in the cards. Replace long-term investing with hedging and trading.

NDX 4100   Should assume it’s slow grind downward thanks to Apple and Amazon.

SPX 1900   We could get a dead cat bounce and hit 1950 or even 2000. The rally is short-lived due it being based on Fed action and not fundamentals.

RUT 1000  It was July of 2013 that we last saw the broad based index this low. The Russell has no ‘safe-guards’ and is the most pure form of order flow into the general equity markets. Currently the outflows have stopped and we are seeing consolidation. Use the Russell to gauge how best to move forward.