RF's Financial News

Sunday, July 24, 2016

This Week in Barrons - 7-24-2016

This Week in Barrons – 7-24-2016:

“What if I’m wrong?”… Keanu Reeves

Thoughts:

It’s hard to believe that that the birth of the Internet happened 18 years ago, and Cisco is still trading 60% below its 1998 $82 price tag. Just like the late '90's, those of us who are sticklers for fundamentals, are not having a ton of fun in today's markets. It's really hard to get excited about buying a 10-year Treasury knowing that over the next decade you will earn a whopping 1.57% per year. Or investing in a company like General Mills that is trading at 26X earnings, with a negative 3-year revenue growth, a negative 3-year earnings growth, and a whopping 2.5% dividend yield.

The simple fact is that no one knows what Negative Interest Rates are doing to our global economy. Even one of the smartest men in the room, Charlie Munger of Berkshire Hathaway is confused. At a recent meeting, Charlie responded to a question about negative rates by saying: “Of course I'm confused. Anybody who is intelligent who is not confused doesn't understand the situation very well. There are a lot of folks running around giving very precise advice and suggestions about how all this plays out in the months and years ahead, and I would suggest that you pay attention to these highly confident prognosticators at your own peril." The funny and sad thing about negative rates is that the Central Bankers who created them are equally clueless as to exactly what type of outcome we are to expect.

And that is why 2016 is so different than 1998. Unlike 1998, today there are very few places of market undervaluation. After seven years of massive Central Bank bastardization of the free markets, it is exceedingly difficult to determine what is right. Our extended FED has invested in over 2,500 individual stocks and mutual funds, with the big unknown being how long they will be allowed to play in that sand box? Will we have to see pension plans go under? Will there be a popular uprising once people realize that the promises made to them will NEVER be honored? There's an old poker saying, “After 30 minutes if you don't know who the patsy is – then it’s YOU”. In this market it’s hard for me to identify the patsy, and that means that it could be me.

So what if I’m the patsy, and I’m wrong? A couple weeks ago FBI Director Comey told us that: (a) Hillary lied under oath, (b) Hillary did have classified documents on her private, unsecure server, and (c) Hillary’s server was probably hacked. I remember blasting Dir. Comey for NOT pushing for prosecution because it was his view that no prosecutor would have taken the case.

But something didn’t sit well with me. What if I was wrong? Dir. Comey obviously knew that the American public would boo, shout ‘double standard’, and talk about ‘selling out’. And then it dawned on me – under normal circumstances, the FBI would have completed their investigation and presented their findings to the Attorney General for her decision. The FBI would NOT have told the public what they found. You and I would NOT have heard about the classified emails, the lying, and the hacking. But rather the Attorney General would have locked down ALL of the findings as evidence.

Dir. Comey (by doing what he did) allowed J.Q. Public to see what a #CrookedHillary – Hillary Clinton really is. He put the facts out there for the whole country to see. If he had continued with business as usual, Attorney General Lynch would have sealed those records and said nothing. By suggesting that ‘No prosecutor would have taken the case’, he handed both Chris Christie and Rudy Giuliani (former prosecutors) the PERFECT fodder to go ballistic and say on the record: "If I was still a prosecutor, I sure would have TAKEN that case!" In fact Governor Christie (at the Republican convention) held court, with the audience shouting “She’s Guilty”. And Governor Giuliani looked directly into the camera and said: “As a former prosecutor, I couldn't have had a better case to prosecute than #crookedHillary Clinton!”

They could only say those things, because Dir. Comey did what he did. Dir. Comey handed Gov. Christie, Gov. Giuliani, and the American people a chance to compare the FACTS, to Hillary's statements, and see if they still wanted to vote for her. Comey handed the Republicans all the firepower they needed to continue a civil suit against her lying under oath. In politics, there are no coincidences, and nothing happens that isn't planned. What looked like the absolute abolishment of rule of law in America, where there's one law for the elites and another for us peons, has instead given the American public a chance to prosecute Hillary.

There's a lot going on out there including: racial and economic trouble, a bizarre Presidential race, terror, moral decay, military tensions, and the list goes on. I’m looking for calmer heads, societal healing, and a continued hope that I am wrong.

The Market:

Factually:

- I wondered when the layoffs and firings would start. This week: Schlumberger announced that it is laying off 8,000 more, John Deere is cutting 11% of its workers in Moline, Illinois, and Conoco Phillips is cutting 1,000 jobs.

- General Electric (GE) beat their estimates this week but the real numbers showed: Organic Sales -16%, Power Sales -27%; Equipment Sales -30%; Aviation Sales -37%.

- Real per capita GDP has risen at an annual rate of 1.3% since the current expansion began in 2009 – less than half of the 2.7% average since 1790.

- The Gross Federal Debt last quarter was 105.7% of GDP – compared to 73.5% in the final quarter of the 2008 panic.

- This week the IMF came out and lowered it's growth outlook for the global economy.

- The Residential Construction Report from the U.S. Census Bureau and from HUD reported that both permits and housing starts were down from a year ago. For permits, they were down -10.1%, and the 2^nd annual decline in as many months. In each case the year-over-year loss was in the multi-family sector.

- Unfortunately economists believe that deficit spending is a trap that provides a transitory boost to economic activity that is more than reversed over time.

- The best evidence suggests the U.S. Government deficit expenditures are costing the taxpayers 1% on each dollar spent. That means during times of deficit spending – it’s actually costing the taxpayer MORE than it benefits him. According to Hoisington and Hunt: “As debt levels rise, the debilitating impact on growth speeds up exponentially.”

Lately, earnings continue to be manufactured, but the top-line sales-revenue numbers (on year-over-year basis) have been weak. It’s one thing to beat expectations, but beating year-over-year actual numbers is quite another. As an example, the major banks beat expectations, but their top-line numbers were not good on a year-over-year / growth basis. The buy-backs (reducing floats), cost cutting, and other profit margin expanders continue.

For the second week in a row, the market simply went up. It doesn't matter how bad the economic releases are, or how low the volume is – it just keeps levitating. The choice is easy, as the market makes these new all time highs, (a) Will the underlying economy catch up, or (b) Will the market fall down to meet it?

The true economy does not support a 19K DOW or a 2200 S&P, but we are very close to both of those numbers. Due to our Central Banks printing trillions of dollars, and injecting them into the market - the market is no longer a reflection of the underlying economy. Consider what Bloomberg said this week about Japan's stock market: “The Bank of Japan is now a major owner of more Japanese blue-chips than both BlackRock (the world's largest money manager), and the Vanguard Group (which oversees more than $3 trillion).” The Swiss (not to be outdone) have (according to Bloomberg): “Increased their holdings in the U.S. equity market by 40% going from $26.7B last quarter to $37.5B this quarter.”

So that’s why the market is going up despite lousy economic reports, lousy corporate earnings, etc. The question is how far can it go? If our FED continues to print money out of thin air and buy stocks with no regard to price, could we see DOW 40K? I tend to think that long before anything like that happens, one of many different black swan events will put an end to all this nonsense. Let's face it, every major nation has big debt troubles, and war is on the doorstep all around the globe. Something will break, and it won't be pretty when it does.

Other than earnings, there is not much on the horizon that should impact markets directly. The Fed is sitting in the shadows with no rate hikes coming any time soon, certainly NOT before the election. The Aussie Dollar is selling off against the U.S. dollar, as investors expect the Reserve Bank of Australia (RBA) will cut rates. If they don’t cut rates we could see a rally in the Aussie dollar. The silliness is the belief that the U.S. Fed will be raising rates any time soon. The currency markets will continue to drive market volatility, and if the dollar continues to rise – this will put increased pressure on U.S. corporations and the economy.

Currently all I’m doing is playing around the edges. In this game of musical chairs, when the music stops, the dash for that open seat is going to be spectacular. For this coming week, I think the market will take a pause to do some backing and filling. We're already so overstretched that normal comparisons are impossible to make. No one has ever seen a market like this, because before 2008, central banks were not allowed to be in the market like they are now. Ten years ago the idea of our FED buying tens of billions worth of US stocks was a laughable concept. This market sideshow will be awfully interesting to watch as the next several months unfold.

TIPS:

My attraction to the metals continues to grow. Some relatively inexpensive ones are: FFMGF, NAK, BAA, AUMN, EGO, and FSM. I’m keeping it simple by being:

- Long various mining stocks and their respective call options: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.

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, July 17, 2016

This Week in Barrons - 7-17-2016

This Week in Barrons – 7-17-2016:

“Déjà vu all over again”… Yogi Berra

Thoughts:

I remember September 1998. My friend and I had just sold a company, and every day we watched stocks go higher – despite most of the companies not having any revenues or earnings. We were told that it was a new paradigm where earnings didn’t matter. It was a melt-up like I had never seen before. Then it flattened out for about a year, and in October of 1999 it started up higher and faster than before. The similarities are Yogi Berra’esque. From 2009 to 2015 the market has relentlessly moved higher. But for the past year, the market has moved sideways, and in the past month is exploding higher.

Following the October 1999 move, we crashed hard. By 2002 the market was down 60%, fortunes were lost, and over 200 stocks that had traded over $100/share were either gone or trading for under $1. Yes, I think this is “Déjà vu all over again”. I don’t know how high or how long this run up will last, but I'm fairly certain that a black swan event will end it abruptly.

WHY are we at all time highs?

- #1 Corporate Buybacks – Last week the WSJ reported that the total number of shares outstanding in S&P 500 companies actually fell below 2011 levels. In Q1 2016, Companies repurchased the 2^nd largest amount of their own stock ($161.39B) in history. With fewer shares for sale, a smaller number of buyers can manipulate the markets.

- #2 Retail Investors are Gone – Last week was the 18^th consecutive week of money flows leaving the equity markets, and ETF money flows are also down 20% year over year. With fewer retail investors, it’s easier for the Central Banks and the FED to manipulate the markets.

- #3 Insiders ‘KNOW’ – If the ‘elites’ want to push us to 2,500 on the S&P, I’ll go along kicking and screaming. Friday night in Australia, Mr. Mester (a Cleveland FED member) suggested that ‘helicopter money’ could be the next step for our FED. Maybe the insiders know that such insanity is coming, and are just front running its implementation.

Given the FED can print money, and use those ‘printed dollars’ to buy real stocks – you can make the case that this market goes up until it doesn’t. After all, today’s Central Banks and their affiliates own $21 Trillion of government bonds and related securities – most of it purchased since the 2008 crisis. In Europe, Mario Draghi is buying up 90 Billion Euro's a month of corporate bonds. So what STOPS the market from going up forever?

- #1 Bad Investments – As you can imagine, companies that are on the ropes are more than willing to sell corporate bonds to stay afloat. Therefore, a lot of what the Central Bankers are purchasing is toxic.

- #2 No Safe Zone – Following the recent BrExit vote, the pound sterling went into ‘free fall’ with lows against the dollar not seen since 1985. With the pound sterling falling this low this quickly, there is a strong chance that a British recession could be right around the corner. And with almost all of the $60 Trillion global sovereign debt trading at yields of less than 1 percent, there are no longer any long term, safe cash-flow returns for investors.

- #3 Bank Defaults – Two of the largest banks in the world Deutsche Bank (German), and Credit Suisse Bank (Swiss) are under EXTREME financial stress. This circumstance can be linked to the entire Italian banking system that is in desperate need of a capital infusion. The Italian banks alone have $400 Billion (one-third) of all of the Eurozone non-performing loans. Unfortunately Eurozone rules preclude the Italian government from backstopping their banks with Italian taxpayer funding. The recent BrExit vote has highlighted the EU banking institutions as being the Achilles heel of the entire global financial system.

- #4 Political Unrest – Between October 2016 and May 2017, there will be elections in Italy, Germany, Netherlands, and France. If a political party hostile to the EU claims victory in any one of these elections, then in all probability that country will dump the Euro.

A political event or a failure by any major bank in Germany, Switzerland, or Italy could easily end the EU and the Euro. This toppling would most assuredly collapse the world into a global depression. Even with all of this, the remaining two canaries in the coalmine are:

- #1 Terrorism – When the California and Orlando shootings took place, everyone jumped on gun control – forgetting that it’s the evil person behind the weapon that’s the problem.

- #2 Price of Gold – After a five-year correction off the 2011 high, the current price trend is solidly up. This is often an indication that the world’s economic positions are shifting again.

The Market:

Factually:

- The Bureau of Labor Statistics reported that real average hourly earnings DECREASED by 0.2% in June.

- If you believe the headlines, Alcoa reported earnings this week that beat their estimates on robust Chinese demand. However, if you examine the numbers, the actual quarterly revenue is DOWN -15% year-over-year, and quarterly earnings were DOWN -91.80%. Even earnings per share came out in the red at -$0.45.

- The number of job openings in the U.S. FELL in May to its lowest level of the year, and the largest decline since August 2015. This is potentially a sign that the spike in hiring in June was an exaggeration.

Information was released earlier this week proclaiming Toria Nuland (Assistant Secretary of State for European Affairs) as the mastermind behind the Feb. 22, 2014 regime change in the Ukraine. Toria was responsible for plotting the overthrow of the democratically elected government of President Viktor Yanukovych while convincing the U.S. mainstream media that the coup wasn't really a coup but a ‘Victory for Democracy’. We (the U.S.) spent $5B to pull this coup off. And after trying to pin OUR Ukrainian coup on Vladimir Putin, we then tried to cripple him economically with sanctions.

The reason I’m bringing this up is on Friday afternoon, I learned that a military coup had taken place in Turkey. Supposedly, the military had shut down the bridges, blown up helicopters, and turned off satellite antennas, Facebook and Twitter. Even President Ergodan was in hiding. The first thing I wondered was whether the U.S. was behind the coup. Why – because Turkey is a NATO nation, and any small action by a NATO ally could trigger a massive missile launch toward Russia and a corresponding retaliatory effort. Listen to this 90-second video as Vladimir Putin pleads to journalists to wake up. He talks of the U.S. spreading lies and leading the world toward a nuclear war that may be irreversible. https://www.youtube.com/watch?v=8PgSX-WD96Q. Coincidentally, when people ask me how we are going to ‘globally’ get ourselves OUT of this economic disaster, my answer is: WAR.

In terms of next week, it was my guess that after our most recent two week melt up we might see a bit of a pause this coming week. However, with the Turkey situation being somewhat fluid, the picture is a bit warped. The markets could take it pretty hard. But in the most recent past, our markets have feasted on terrorism without blinking. We even survived the BrExit, and have gone on to all time highs. If there is a take over, and it is deemed to be good for the overall region, we could actually see Europe trade higher Sunday night and come into a green market on Monday.

Otherwise, please be careful.

TIPS:

#1 – If you were with me on the play in AG, you have seen your $20k turn into about $250,000 in about 8 months. I’m still sitting on my AG call options – so no changes there just yet.

#2 If you played NGD with me, you have seen it go from $3.75 to $4.67 (a 25% increase) in about 2 months. My plan is to buy more NDG options, once it breaks through $5.00.

#3 I’m lightly shorting Alcoa (AA) at these levels. It’s common for AA to experience an almost 30% retracement over the next 4 weeks following earnings. That means it would drop from $10.92 to $7.64 by late August. AA was down to $6.10 just a few months back. My short target is its recent support at $9.88.

#4 My attraction to the metals continues to grow. There are dozens of good mining companies that will do well if gold and silver continue higher – such as: FFMGF, NAK, BAA, AUMN, EGO, and FSM. Silver is presently around $20 per ounce, and I think it has a date with $70/ounce. I’m looking at January 2018, $7 calls in SAND. I’m waiting to buy them for $1. SAND was a $14 stock in 2012 – so buying a good company with an underlying commodity that’s increasing in value is a good bet in my book.

So go the miners – so go my weeks. Last week was a good week. I’m keeping it simple by being:

- Long various mining stocks and their respective call options: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, and PGLC.