This Week in Barrons – 8-7-2016:
$200 Billion a Month…
Thoughts:
$200 Billion A Month is the amount of QE being delivered by Central Banks
around the world. So if you are a
corporation with stocks or bonds to sell – my advice would be ‘sell early and sell
often’ because every 5 months, $1 Trillion comes ‘out of no where’ and into the
world’s capital markets. Some of it is
being used to buy Government bonds and Sovereign short-term notes, but after those
purchases showed little impact – the Central Banks started buying corporate
debt.
Corporate debt is formed when
a company needs cash, and sells its own bonds above normal market rates. For example, if Uncle Sam is offering to pay
you 0.5% per year interest on a $100k investment, a company like Apple could offer
to pay you 5% per year to buy $100k worth of its company’s debt. If the company is a well-run company like
Apple, J.Q. Public will be paid back.
However, if the company is not as well run as Apple – and decides that after
selling a few million in debt notes to fold, then J.Q. Public will be lucky to
get a few cents on the dollar back on his investment.
The problem with
Governments using taxpayer money to buy corporate bonds is their lack of analysis
and due diligence. Governments simply have
a number of bonds that they are prepared to buy each month, and they end up
giving money to badly run companies along with well run ones. Also, when Central Banks are buying with
reckless abandon, company executives start using that money for ‘non-growth’ investments
such as: stock buybacks – which push their own stock price higher even in the
face of declining earnings to sweeten the paycheck for the corporate executives.
For years now I’ve been telling
you about how various Central Banks have been buying U.S. stocks. The Swiss National Bank is the worst offender,
and currently holds $63B in U.S. stocks.
Here’s a link showing you each and every stock they hold and the
corresponding quantity. For example they
own: 15m shares of Apple, 21m shares of Microsoft, 26m shares of GE, etc.
There is NO true price discovery
when a government can print money – and use that ‘fake’ money to buy ‘real’
stocks. What is the real value of a
stock if you have a buyer with endless pockets that doesn’t care about how much
they are paying or earning on the stock?
Even CNBC’s’ Jim Cramer gets it. The other day (on camera) he was wondering how
the markets could be so strong with low volumes, saggy earnings and big
investors moving money out of the markets? Then he said: “It’s Japan! The Government Investment Pension Fund of
Japan has taken enormous stakes in individual U.S. companies. The list includes $2B worth of General
Electric stock, $1.5B in Alphabet/Google, $100m in Whirlpool, $180m in Eaton,
and $150m in Roper Technologies. Now, if
you do these aggressively, under low volume, you actually move these stocks."
Cramer went on to say: “It
seemed odd to me that some of these stocks have stayed afloat despite reporting
so-so earnings. This
is concentrated buying by the government.
Unlike the Federal Reserve, which opted to buy Treasury bonds, Japan has
bought stocks -- individually and broadly -- as well as bonds and real estate. I’m astounded to learn of this tactic. This fund has to have been one of the
biggest, if not the biggest, buyer of GE stock last month,” he said.
This is why this market is
still flirting with all time highs while the economy is in the toilet.
-
$200B a MONTH in
QE,
-
The Swiss National
Bank buying $63B in US stocks, and
-
The Japanese
buying umpteen billions in U.S. stocks, despite
-
A GDP reading of
1.2%,
-
650 interest rate
CUTS since 2008 (one rate cut every 3 trading days),
-
And total earnings
being lower for 4 straight quarters.
How far can this madness
can go before it ends – is a mystery. How
bad will things get when it blows up – is another mystery. Remember, institutions like Central Banks and
the Swiss National Bank have ‘no skin in the game’. They PRINT money like it’s monopoly money. The Swiss National Bank could lose 90% of its $63B
investment and still sleep like a baby – because in the morning they would just
print and buy more.
We are in uncharted
waters. Normally in this situation,
experienced sailors slow to idle speed.
They check depth indicators and scan the water for surface patterns that
might suggest rocks. The same thing should
be true in this market. I’d want to be
more than just casually cautious about buying something here, because who knows
what lurks beneath the surface? Who
knows what stops this madness? Tread lightly
and stay aware because you’re living through a historic time.
The Market...
On Friday, the Non-Farm
Payrolls Report showed that the U.S. added 255k jobs in the month of July. But what wasn’t said was:
-
It was the
largest ‘seasonal adjustment’ in 10 years that accounted for 170k of those
jobs,
-
Another
significantly large ‘birth/death model’ accounted for another 112k of those
jobs,
-
So if I subtract
off the government ‘fudged’ numbers (‘seasonal adjustments’ and the
‘birth/death model’) – we actually LOST 27k jobs last month.
Loosing 27k jobs last
month brings us in line with:
-
Challenger Grey
coming out and telling us that there was a 19% increase in layoffs to 45K last
month, and
-
The Government
showing a 1% reduction in actual withholding taxes paid in the last month,
along with last month’s 12% reduction in corporate taxes paid.
The market is all about
‘recession avoidance’. Just like the
Democratic National Convention was rigged against Bernie, the stock market is
rigged to be buoyant despite any of its economic ills. So do we simply move higher every day into
November? As silly as it sounds – that COULD
happen. We’ve moved considerably higher
on the heels of: QE, zero and negative rates, the buying of stocks by Central
banks and of course the fudging of the economic data. While it’s fun while it lasts, the question
is: How long will it last? After all,
trees don't grow to the moon, and markets will not rise forever. This could splinter in many different ways:
-
The Eurozone
could disintegrate back into 28 separate nations and currencies – which would
take down the European Central Bank.
-
War could be
declared between NATO and Russia – and we step in.
-
The U.S. could get
drawn into the conflict in the South China Sea over Man-Made Islands.
-
The velocity of
money could suddenly increase, and almost overnight we could go from 8% inflation
to 20 or 30% inflation.
-
China could suddenly
say that they have 30K tons of gold, and crash the world’s treasury markets by
selling off all of their foreign treasuries.
-
Or maybe Italy
pulls out of the EU (which is ‘no big deal’), but as a result their oldest bank
collapses. The Italian bank collapsing
would pull the pin on the derivative grenade at Deutsche Bank (DB). This would cause DB to implode and take out
half the Bank of Japan. The Bank of
Japan would be forced to sell all of their U.S. holdings, which would trigger a
sharp U.S. market crash – and so it goes.
One thing is certain, if
printing fake money forever was the way to true success, it would have worked
any one of the times that it has been tried. Am I to now believe that because ALL nations
are trying it, it's going to work? Sorry
I don't think so. The Reset is coming.
I think the reason Gold is
moving higher is because everyone is beginning to see that years of QE haven't
solved the economic issues. FED policy
has failed. And the EU and BOJ spending
umpteen billions each month only cause their economies to sag more. Everyone is noticing China (one of the few nations
that is actually growing) buying every last ounce of gold they can get.
My only suggestion on
whether to invest in this market is this: If you do so – ONLY do it as a
‘trade’, NOT as an ‘investment’. In
terms of ‘trading’, I would lean into this market and take what you can get. But for any long-term investments like 401k’s
and IRAs – I can’t recommend taking that much risk. My worry on the 401k and IRA side of things,
is to make sure that when this ‘gravy train’ starts to crumble – you can get
out quickly.
Enjoy this run, but
understand it for what it is – a manufactured run to make everyone believe that
all is well with our economy. My biggest
fear is that this doesn’t end with a gradual ‘sideways to down’ cycle, but
rather with a: ‘limit down’ one day, ‘limit down’ the next, everyone trying to
get out, and circuits blowing up. Be careful.
TIPS:
Thanks to SF for
questioning what would happen if the U.S. Government took a similar position on
banking & insurance as South Korea took against Volkswagen’s emissions
discrepancies. “Volkswagen (due to their
complete disregard for our emissions legislation) is stripped of its right
to sell 80 car models in this country. A Volkswagen executive (stationed
in South Korea) has been indicted on charges of falsifying 140 documents. Prosecutors have indicated that they will be
seeking similar criminal charges against other Volkswagen executives.”
From your e-mails it’s
clear that many people are jumping on the gold & silver miner investment
bandwagon. Here are three small miners
that you potentially haven’t heard of:
-
Mirasol (MRZLF) is a company that finds good projects,
and then partners with larger mining companies to carry them through to
production. Mirasol has an ‘A-List’ management team, and is working in
‘elephant country’ down in Chile and Argentina.
‘Elephant country’ is where you find big, undiscovered reserves.
Mirasol has a market cap of $103.7 million and 44.7 million shares outstanding.
-
East Africa Metals (EFRMF) is looking for gold in Ethiopia, and finding it. They expect to have a mine in production next
year. They are a small company with a
market cap of $25.7m and 113 million shares outstanding.
-
Telson Resources (SOHFF) is also a small market cap company ($22.2m) and 92.9m shares
outstanding. It just secured a $10m line
of credit and is advancing its Mexican Tahuehueto silver-gold project. They should have revised projections out
shortly, and I’ll keep you posted.
My attraction to the
metals continues. Some relatively inexpensive ones are: FFMGF, NAK, BAA, AUMN,
EGO, and FSM. I’m keeping it simple by
being:
-
Long Calls in
GOOGL, and
-
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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