RF's Financial News

Sunday, February 21, 2016

This Week in Barrons - 2-21-2016

This Week in Barrons – 2-21-2016:

Thoughts:

“And … it’s gone!” … https://www.youtube.com/watch?v=-DT7bX-B1Mg

Dear Ms. Yellen:

In the classic South Park episode above (https://www.youtube.com/watch?v=-DT7bX-B1Mg https://www.youtube.com/watch?v=-DT7bX-B1Mg ) - young Stanley opens up his first bank account during the Financial Crisis of 2008, and learns very quickly that banks might not be the best place to keep your money. After this valuable lesson, I wonder what Stanley would have to say about this week’s banking push to ‘ban cash’. After all, there’s a reason for cold, hard cash – it makes no enemies.

The movement to ban cash has been going on for decades, but has lately picked up momentum. On Monday Mario Draghi, the ECB President, disclosed that he is considering banning the 500 euro note. That was followed by an op-ed piece by the former Treasury Secretary Larry Summers pushing to ban the $100 bill. Their reasoning is that cash is inconvenient, and only criminals, terrorists, or tax evaders would have large amounts of it. Of course this is nonsense, as criminals and crime certainly pre-date cash. To make this even more bizarre, cyber-crime has increased to a point that it is greater than all crimes transacted with cash. I believe that our next war will not be nuclear, but cyber in nature. I don't fear a nuclear exchange. I fear waking up one day to no electricity.

I find it amusing that people are recommending the ‘banning of cash’ as a ‘fix’ for our economy. The common thinking goes like this:

- The U.S. economy is going downhill, so the FED will be forced to join Japan, Sweden and the ECB – and introduce negative interest rates.

- That will simply force investors into metals and Treasury bills for safety.

- Then the FED will ban the use of cash so that banks can charge a fee on EVERY transaction, and give the IRS instant ‘access’ to all account(s).

I have a problem with this common thinking. As I've said many times: Central Bankers aren't stupid – they’re just evil. They know that it’s mathematically impossible to repay our debts. Limits on cash transactions are nothing new, but the reason for that has nothing to do with the $100 bill. The limits are a result of our ‘fractional reserve banking’ system. The major flaw in our system is that if everyone asked for their money back at the same time – the banks would fail. Why? Because banks take their depositor’s cash and lend it out again and again to others. This allows banks to lever several deposits into millions of loans.

In 2008, our government ‘bailed out’ many banks, and saddled the taxpayers with the bill. In 2013, the citizens of Cyprus were told that if they wanted to withdrawal their savings – they would only receive 90% of their funds, with the other 10% being seized by the bank. In 2016, with 25% of the world’s GDP now operating in a negative interest rate environment – a new threat to Central Banking has arisen. What if the thought of PAYING a bank to hold our own money causes us to withdraw all of our money from the bank itself? This could cause a ‘run’ on the banks, and the banks would NOT have the cash. A simple solution could be to just ‘Ban the Cash.’

The unwanted side effect of negative interest rates is pushing people to hold money outside the banking system. Banks and governments do not want this to happen – as they know that a surge in withdrawal requests would bring down the entire system. The logical thing to do (and something that bankers have wished they could do for centuries) is to ‘ban cash’ and force everyone to hold their assets electronically – controlled by the banks and the governments.

Call me old fashioned, but OOPS there goes another basic freedom. I feel the freedom to control my own property and savings (outside the governmental and banking systems) slipping through my fingers as we speak.

The Market....

…Thanks to JW for the following chart:

Do the people in charge LOOK like they know how to balance a budget? If YOU had a credit card balance of $142,000 and your annual salary was $22,000, what do you think would happen to you, your credit rating, and any hopes of re-payment? A wise friend once said: “You can choose to ignore the math, but in the end you can’t avoid it.”

Factually:

- 50% of Canadians say they are within $200 a month of being unable to pay their bills.

- Bombardier just announced a 7,000 person layoff, and Air France announced another 1,400 job cuts.

- Mortgage applications fell 3% last month, while housing starts fell 3.8%.

- The January PPI showed inflation rearing it’s head with a reading of 0.4%.

- The Empire State and Philly Fed Reports showed our economy contracting for the 7^th month in a row.

- Wal-Mart announced slowness, and will virtually see NO growth this year.

- China's record debt levels expanded, while their exports fell another 11%.

“We can deal with bad news and we can deal with good news – what we can’t deal with is uncertainty!” And that is exactly why gold and the precious metals are moving higher. Would you rather own a gold coin that just sits there, or put $1,000 in the bank and PAY the bank a percent to hold it for you? And if our government wants to ban cash, then I’ll really need to own some more metal.

How do you play the metals? FIRST (and most importantly), start with some physical gold and physical silver. Once you have the physical side covered, the next step is to invest in the miners that will survive. The GDX is an ETF of the bigger miners – while the GDXJ is an ETF of the ‘junior’ miners. The ETFs present an easy way to get exposure without having to pick individual winners. Another ETF to consider is SGDM – the Sprott Gold Miners. It tracks the Sprott Zacks Gold Miners Index, which is rules-based, rebalanced quarterly, and seeks to identify about 25 gold stocks with the highest historical beta to gold price ratio. The weighting also depends upon quarterly revenue growth and balance sheet quality (long-term debt to equity). Otherwise, there are many small miners that will do well if gold and silver continue higher. Unfortunately some of the best are located in Canada. One that comes to mind is Lakeshore Gold, but it only trades on the Canadian TSX exchange.

The next 2 years will be fraught with major problems. Central banks will continue to try and keep their economies alive until a global agreement to write down debts, and replace the global reserve currency with something more substantial is in place. As all this unfurls, we're going to see more volatility. Our own FED is presenting a face of ambiguity (not Hawkish or Dovish), which fuels volatility.

Six trading sessions ago, the market was inches from falling over a tall cliff. Rumors were circulated about oil production cuts, and from that intra day low of 1810, the S&P has gained over 100 points to 1926. On Thursday there was a bit of a pull back and on Friday we ended the day flat. So (a) have we run out of gas at resistance, and the market is ready to roll back over? Or (b) was that just the ‘pause that refreshes’ before we continue to push higher?

Friday had its chances for the market to fall, but it didn’t. In fact, it came back and almost closed ‘green’. That leads me to believe that they want to push this market higher. If there’s no horrible news out of China and oil remains above $26 / barrel, I think we try and slowly push higher. There's significant resistance at 1940 on the S&P. If we reach that, the going gets even tougher, and a stretch to 1950 would be the next target.

In the long run, I believe we see the S&P fail the 1810 low, and send us down another 15%. But I could see them try and take us higher first. On Friday, the small caps held a gain while the financials struggled to end the day flat – another indication that this market is not willing to fall. Good luck and stay nimble.

TIPS:

“A liberal’s paradise would be a place where everybody has guaranteed employment, free comprehensive healthcare, free education, free food, free housing, free clothing, free utilities, and only law enforcement has guns. And believe it or not, such a place does indeed already exist: it’s called Prison.”

…Sheriff Joe Arpaio – Maricopa County, Arizona.

DOW 16,391:After a rally up into resistance, I would expect to see some selling and profit taking here – as this is the previous high at the end of January. Look for 16,000 as short-term support.

NDX 4164: The tech heavy index has some room to run, and we could see volatility. Expect resistance at 4300, and support down at the 4000 level.

SPX 1917: We are up into resistance, so expect some selling pressure as investors take profits or minimize losses. I would look at 1860 as being short-term support in a sell-off.

RUT 1010: The Russell is not showing any strength. It looks like it has lost momentum, and a move below 1,000 could indicate it is heading towards 980.

I am watching:

- Coach (COH) and Bank of America (BAC) for covered call situations,

- Terex (TEX) look at a Put Credit Spread as it is a take-over candidate,

- And Kroger (KR) around the $36 level is an interesting buy.

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

- Long CRM – Mar 82.5 – Free Calls courtesy of a Diagonal,

- Long FIT – Mar 21 – Free Calls courtesy of a Diagonal,

- Long HD – Mar 135 – Free Calls courtesy of a Diagonal,

- Long NKE – Mar 67.5 – Free Calls courtesy of a Diagonal, and

- Sold TEX – Apr 19 / 20 – Put Credit Spread.

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, 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.