RF's Financial News

Sunday, February 14, 2016

This Week in Barrons - 2-14-2016

This Week in Barrons – 2-14-2016:

Thoughts:

“It’s the end of the world – as we know it.” … R.E.M.

The "End of the World" just doesn't happen overnight. People have been predicting it for eons. To name a few: in 1524, a group of astrologers predicted that the world would end by the turn of the century as the result of a flood starting in London. Martin Luther (a man of God) predicted that the end would come no later than 1600. And Christopher Columbus (an explorer) claimed that the world would end in 1658. But right now, I'm most anxious about this particular world’s condition.

- Global financial indices are crashing in concert.

- Trade (as measured by the Baltic Dry index) has collapsed.

- Sweden, Japan, Denmark, Europe and others are implementing negative interest rates.

- Spain is PAYING interest to borrowers for buying homes.

- Oil and commodities are at multi decade lows.

- China is sitting on idled plants, bad loans, and desperate for demand.

- Europe has been besieged with millions of refugees looking to transform those European countries into Muslim nations rather than assimilate.

- Political candidates Trump and Sanders (who most considered to be sideshows) are sweeping the nation shouting: “Vote the bums out.”

- Physical gold is once again yielding better returns than cash in the bank, and I don’t have to pay anyone to hold it for me.

The other day the question was asked: How would you invest $5,000 safely?

My short answer was:

- Buy a $1,200 (one ounce) gold coin.

- Buy $800 worth of silver eagle coins.

- Buy a $1,000 U.S. Treasury bond.

- Buy $500 worth of an agricultural stock, (we can live without iPhones but not without food).

- Buy a nice gun for $500 (protection and appreciation).

- And keep $1,000 in cash – at home – in a safe.

In virtually every other decade of my life, the answer to that question would have been amazingly simple, and a lot different. I would have stressed the magic of compound interest. Assuming a 6% interest rate, I would have talked about putting that $5,000 in a bank, after 10 years turning it into $8,954, and after 30 years turning it into $28,717. Then I would have asked the person if they could possibly add an additional $5,000 a year to that amount – each and every year? After 40 years you would then have a grand total of $871,667 – of which you have only contributed $200k. That’s how fortunes used to be made. And people then lived out their years collecting 6% on the final amount – leaving the principle to their children.

But those days are gone. In what can only be described as a perverted situation, interest rates are now 1% - not 6%. So investing $5,000 where it won't disappear in a bank ‘Bail-In’ – is a good question. The above mix should get your money back. The gold and silver coins should appreciate nicely. The agriculture stock might fade, but if it's a major player like a Mosaic (paying a 4% dividend) – it will be ok. The enemy of the Treasury bond is inflation. The gun is for personal safety, and for value appreciation. And finally, cash affords the safety of having actual money on hand in the case of a ‘Bank Holiday’ where all of the ATM’s are closed for a week. Remember, ‘protecting’ what we have is just as important as ‘creating’ more of it.

If you have ever toyed with the idea of buying physical gold and silver, I'd use any dip in this price to do just that. The same statement can be made about the miners. It’s time to revisit both of these categories. The window of ‘cheap’ is about to close.

The Market....

I’m reminded of 3 statisticians that are out duck hunting. When they spot their first duck, the 1^st first statistician takes a quick shot and misses the duck 6 inches high. As he’s reloading, the 2^nd statistician takes aim and fires; he misses the duck 6 inches low. The 3^rd statistician drops his gun, leaps in the air and yells: “Boys, we got it now!” This joke (although not laugh-out-loud funny) is designed to illustrate a common problem with relying on averages. Namely, that if you’re using averages to make specific decisions or determine particular actions, you’re likely to completely miss the mark.

Well on Thursday we were ‘right there’, ‘on the mark’, at the ‘edge of the cliff’. The DOW was down over 400 points and for the first time in years the S&P was under the ‘all important’ 1812 level. Then it happened. Like clockwork a headline hit saying that OPEC had agreed to cooperate on an oil production cut. Instantly the S&P gained 20 points, and the DOW gained 200. It was both comical and criminal at the same time. This headline (in particular) was so unbelievable that even floor traders on the exchange were joking about it. The funny part is that EVERYONE knows that: (a) even if the UAE minister really said it, (b) even if OPEC really agreed to it, that (c) NOTHING would happen. No country is going to cut one drop of production. Iran is just beginning to come back on line. Iraq is ramping up. No country is going to sacrifice their own sales today, in order to make the ‘pot’ a little bigger for someone else tomorrow.

On Friday, this so-called news was everywhere. Every station was talking about OPEC production cuts. Job accomplished, as we gained 313 DOW points and 35 on the S&P. So, that's it – some oil minister says OPEC is going to meet and up we go? It didn't matter that they floated that same rumor a few weeks ago. What was interesting is that the other half of what the UAE minister said was completely omitted from most broadcasts – which was: "The people who have spent money and have this investment, it's natural that they won't make cuts." So his quote actually didn’t refer to existing production quotas at all – but rather future endeavors. Imagine that.

Anyway, do I think that we have found the bottom? No. I do think that it could be a short-term bottom, IF nothing blows up when China opens on Monday. (China has been closed for a week in observance of their Lunar Holiday.) But no, I do not think that this is a significant bottom. I think that we have a date with considerably lower levels. If we don't get any bad news on Sunday or Monday night, we should open okay on Tuesday, and possibly move higher.

I don’t see this move higher lasting too long. After we get – ‘whatever we’re going to get’ – then going short should be the plan. There is NO WAY that OPEC will get their member nations to cut production. After all, the Saudi's need to sell every drop they can produce in order to keep their welfare state alive. I think that when markets allow themselves to admit to this reality, we'll see the market roll over once again. After all, we were on the edge of a cliff – and this time a small, murky mention of oil production cuts saved us. I think when those cuts do NOT materialize; we are right back to the brink again. Only this time, someone will push us over.

TIPS:

At their March meeting our FED has 3 options:

- 1. The private sector becomes robust and the economy roars back, giving room for the Fed to raise rates and unwind their trillions in bonds and mortgage backed securities. This is what the Fed is wishing for. Unfortunately, the economy has been limping along for years, and the expansion we see is based on debt. So this is somewhat of a fantasy.

- 2. The more responsible and accountable option is also the most unpopular one. The FED raises rates, begins to unwind their balance sheet, allows the yield curve to steepen, risks deflation and slows growth. Companies would fail, unemployment would rise, and stagnation or even a recession would ensue. This is the responsible thing to do, and it is NOT going to happen.

- 3. They can keep doing what they’re doing. This is the most popular and most likely option. The FED will NOT raise rates, NIRP (Negative Interest Rate Policy) will become a possibility, and the FED comes-up with another stimulus effort. In which case the bond bubble will get larger, the market will rally – and in the end this whole thing will implode. This is the most likely option.

The good news is that the total implosion will NOT happen in the next 6 months. After all, the FED needs time to ramp-up, and that will spike both the equity and bond markets.

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,

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

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

- Sold WYNN – Feb – Put Credit Spread – 68 / 66,

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

- Sold FXY – Mar – Call Credit Spread – 87 / 86,

- Bought FIT – Feb 20 / Mar 21 – Diagonal for 30 cents,

- Bought HD – Feb 130 / Mar 135 – Diagonal for 9 cents,

- Bought NKE – Feb 65 / Mar 67.5 – Diagonal for 42 cents,

- Bought CRM – Feb 77.5 / Mar 82.5 – Diagonal for 22 cents,

- Bought LMT – Feb 215 / Mar 220 – Diagonal for 99 cents.

Presumably what I will do with the ‘Diagonals’ is allow their February components to expire (giving me a perfectly free trade), and then sell another March dated contract against it.

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, 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.