RF's Financial News

Sunday, February 5, 2017

This Week in Barrons - 2-5-2017

This Week in Barrons – 2-5-2017:

“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.”…Plato

Thoughts:

I think that the real threat to American jobs is NOT trade and outsourcing, but rather the accelerating pace of technological disruption. We are on the cusp of seeing entire jobs not simply move offshore, but rather vanish completely due to rapid advances in artificial intelligence, robotics, automation, cloud computing, and other emerging technologies. At the most recent World Economic Forum in Davos, it was estimated that 5m jobs in the world’s leading economies would disappear over the next five years. An example of this is the 4m Americans who make their living behind the wheel of a moving vehicle. With rapid advances in self-driving vehicle technology, their future is now under a dark cloud. Most feel that the 1.7m long-haul truck drivers are especially vulnerable, given that they spend most of their time on a highway where human intervention is needed sparingly. Couple that with the tremendous financial incentive – where over 1/3 of the $700 billion trucking industry goes toward driver compensation. The temptation among trucking companies to cut those costs, and gain a competitive advantage will be irresistible.

Similarly, the potential widespread adoption of block chain technology could lay waste to millions of jobs in the financial services industry. Block chain technology is now used to record and store Bitcoin payments. Startups and large banks are exploring ways to save billions by using this to improve a variety of their other services and compliance tasks.

Clearly, automation is nothing new, but the pace of automation’s march into areas beyond the assembly line is hard to overstate. Consider the new restaurant that just opened in San Francisco that is capable (via machine) of making a fresh, made-to-order, gourmet hamburger every 10 seconds.

If Trump is committed to massive and sustained job growth, he will need to confront the inevitable, relentless advance of disruptive new technologies. This time it IS different – because we are decoupling productivity from job growth. After World War II, job growth and productivity rose in near lockstep. But beginning in 2000, productivity quickly out-paced job growth. Trump’s promise to reduce bureaucracy and roll back regulations will certainly fuel the growth of these new technologies, and lead to more rapid displacement of workers than ever before.

You see, new technology only creates jobs for skilled workers capable of taking advantage of them. Unfortunately truck drivers, and others facing disruptive technologies will see their very livelihoods threatened because most can NOT become software programmers for self-driving vehicles or drone-repairmen.

Moreover, the pace of technology-driven disruption is accelerating as new technologies combine in often unexpected ways. Consider autonomous vehicles using block chain technology for paying transactions. This will quickly signal the demise of taxi drivers and bank employees. Commercial drones combined with cloud stored data analytics will mean less delivery personnel and supply chain managers.

Like most elected officials, Trump has been silent on this key issue – ignoring it at his own political peril. To make good on his campaign promises, his administration will want to focus on training displaced workers for these new emerging jobs, many of which will require programming, engineering, or similar skill sets.

Trump clearly knows a thing or two about disruption – his upset victory in November is proof of that. But will he be able to get out ahead of the coming wave of low-skilled job losses arising from these disruptive technologies? Doing so would help him address what threatens to be a growing source of economic anxiety among American workers. The only protection for the American worker that I see is to build a skill set that focuses on the ability to invent, evaluate, build human trust (sell), interact socially (make deals), and/or program machines on how to do other people’s jobs.

The Markets:

Thanks to CW at Rockhaven Capital for the following:

“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”…Ronald Reagan

Inflation and protectionism are two words that the average American has never experienced:

- They amplify the effects of a currency war. After all, a strengthening U.S. dollar dampens the FED’s hopes for rate increases and fuels ‘stagflation’.

- They allow bond yields to move higher, and could (among other things) put a ‘crimp’ on stock buy-backs going forward.

- They cause trade wars and increase military tensions – which can trickle down to a contraction in P/E ratios and stock prices.

- They limit revenue, earnings, and GDP growth.

- They also modify investor psychology – which is what drives P/E ratios.

A couple simple rules of investing are:

- Raise some cash when times are good, and deploy that cash when times are bad – otherwise known as: Buy low and Sell high.

- When the odds are in your favor you get more aggressive, and when the odds are against you get more defensive. Currently the odds are against you because (as the chart shows) – this market is the second most overvalued market since 1970. But as Alan Greenspan said: “Markets can remain irrational longer than you can remain solvent.”

- Warren Buffett says: "Learn to be fearful when others are greedy, and greedy when others are fearful."

- And Paul Tudor Jones believes: “If investors just learn to sell anything that falls below its 200-day moving average, they will greatly improve their chances of survival.”

And finally, let’s not forget how much the market loved last Friday’s jobs report. The DOW gained 186 points, the S&P picked up 16, and we are sitting just a handful of points below the all-time highs. I suspect next week we will punch through those highs and get our ‘last hurrah’ run higher. But Friday was also about Trump trying to roll back the financial regulations that were put in place after the 2008 melt down. Since 2008 the banks have been moaning that they are being forced to pay more to comply with the rules – than they are making on the loans. The truth is that banks need the regulations to be removed in order to do more financial engineering and to keep the markets moving higher.

Remember, Central Banksters printed money is what keeps this economy inching forward. Institutional banks use that printed money to buy stocks, and then use those stocks as collateral to take on more debt. It's a vicious cycle, and if it ever ends there will be ‘heck’ to pay. For example, consider auto loans. With over 17 million vehicles being sold last year, 6 million auto borrowers with shoddy credit scores are over 90 days late on making their car payments (according to the New York Federal Reserve’s latest figures). The percentage of delinquent subprime auto loans is at its highest level since 2010. With all of the regulations in place, banks can't create any more subprime auto loans, and therefore auto factories will be forced to cut production. So, it’s no surprise that Trump plans to on cut the financial regulations in order to give more people with lousy credit the ability to buy another car. Doesn’t this sound all too familiar?

This coming week we should see the markets push into ‘blue sky’ territory. It should be the one last powerful run prior to a hefty pull down. Just know that this run is engineered and not based upon fundamentals. After all, remember Friday’s jobs report that proclaimed 246,000 jobs were created? The ‘Employment per Thousand’ survey is saying that only 30,000 jobs were created. I wonder which one is right?

Tips:

“Investing does not give out Participation Trophies.”…Chris Wiles @ Rockhaven Capital

People always ask me what chart indicators I use? Of the countless indicators out there such as: Acceleration bands, ADX crossovers, CCI, Bollinger bands, Fibonacci calcs., Relative Strength indicators, DMI oscillators, Linear Regression, VWAP, MACD, RSI, etc. – allow me to outline a couple key indicators that might help you determine if you should be in a trade.

- The first are the ‘stochastics’. According to George C. Lane (the inventor) “the Stochastic Oscillator is a momentum indicator that doesn't follow price, volume, or anything like that. It follows the speed or the momentum of price, because the momentum changes direction before price." Therefore, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. The chart will show you a couple of lines, and in the most general of terms you want to consider buying a stock when those two lines are beginning to cross and are below 20. Also (in general terms), you should consider it a sign that a stock is pulling back when the lines are crossing and are over 80.

- The 2^nd necessary indicator is the MACD – the Moving Average Convergence/Divergence Oscillator. It was developed by Gerald Appel in the late seventies, and is one of the simplest and most effective momentum indicators available. The MACD turns two trend-following (moving average) indicators, into a trend and momentum following indicator by subtracting the longer moving average from the shorter one. As a result, the MACD fluctuates above and below the zero line as the moving averages converge, cross, and diverge.

- The good news is that you can find volume, stochastics, and MACD on virtually every trading platform. In fact, you can go to stockcharts.com, and see all of this for free. The more indicators that line up in the direction you're expecting the move to take – then the more times that direction will become a reality.

- In a perfect world, with a volume indicator and these two charts you could begin to make more informed investing decisions. But make sure that the general market is moving in your direction – as 85% of all stocks move WITH the general market.

Next week I’m watching earnings from:

- Archer-Daniels-Midland (ADM) – a grain distribution company who’s stock regularly goes UP into earnings. Right now, analysts' estimates are at $0.82 per share, and I expect ADM to meet or beat expectations.

- General Motors (GM) – an auto manufacturer is estimating $1.13 per share, but I expect more due to the increase in consumer confidence and high seasonal auto sales.

- CVS (CVS) – is a drug store chain that has ‘taken it on the chin’ due to store closures and revenue disappointments. Earnings estimates are $1.62 per share – but it’s the future that is scaring investors.

- The Dun & Bradstreet Corporation (DNB) – is an information services company that helps customers reduce credit risk. The stock has been trading sideways this year, and analysts are estimating earnings of $3.02 per share, but I expect the stock to drop ahead of earnings.

- The Mosaic Company (MOS) – that is the world's largest producer of phosphate and potash crop nutrients. Analysts have pegged earnings estimates at $0.14 per share, but as the strength of the U.S. dollar has actually hurt their revenues, I suspect their earnings will fall short as well.

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, January 29, 2017

This Week in Barrons - 1-29-2017

This Week in Barrons – 1-29-2017:

Thoughts:

Over the years, I’ve spoken many times about how our Central Banksters are enormous buyers of stocks. I’ve mentioned how the Bank of Japan owns almost 75% of Japan’s ETFs. I’ve spoken about the Swiss National Bank owning billions of dollars’ worth of Apple (AAPL), Microsoft (MSFT), and Exxon Mobil (XOM). And I’ve talked about how our companies are borrowing money at virtually zero interest rates, and using those same funds to buy back their own shares of stock. Just this week, Zero Hedge ran a story on how Central Banks plan on buying even MORE stocks – which begs the question: Can stocks ever really go DOWN? Given Central Banks can both print money out of thin air, and buy stock: How can you ever take a beating?

The answer comes from ‘where’ the money came from. In normal times, you were paid a commensurate wage for your work. So, the amount of money that was in circulation at any given time was directly proportional to the number of goods and services that existed in the world. This kept production in line with demand, and it also kept a lid on pricing. But when the Central Banksters started creating billions and buying stocks, the entire process of consumption being linked to creation and demand was thrown out the window. And what was put in its place was the absolute definition of inflation.

Many people define inflation as "rising prices", but in technical terms that’s simply the result. The true definition of inflation is: "an increase in the money supply". I personally can’t think of a better example of an ever-increasing money supply than our Central Banksters creating money out of thin air, and using it to instantly buy stocks. They are clearly doing it without any productive input to the global economic machinery.

Schemes like this often work in the short term, but go awry because some event causes an increase in the velocity of money and that causes prices to spiral higher. The velocity of money is simply how fast a dollar changes hands. In a hot economy, the velocity is high because everyone is out spending all that they can get. In a sluggish economy, monetary velocity slows as savings increase.

Historically, printing money has never worked. While the injection of money during periods of economic contraction has (at times) been able to keep the wheels from coming off an economy – continued injections lead to runaway inflation. Inflation is starting to become an issue, and will become a larger one over the next several months and years.

A couple thoughts to consider – (courtesy of SF):

- 4^th Quarter GDP came in at 1.9% on Friday – well below the estimates.

- Neil deGrasse Tyson said: “Congress and Donald Trump are considering cutting PBS support (0.012% of the budget) to help balance the Federal budget. This is like deleting your text files to make more room on your 500Gig hard drive.”

- "It's cheaper to buy a $35,000 robotic arm than it is to hire an inefficient employee – making $15 an hour bagging French fries," … former McDonald’s CEO Ed Rensi.

- The South China Morning Post reported that Foxconn (a supplier to both Apple and Samsung) has recently REDUCED total employment by 60,000 people with the introduction of robots.

- More than 67% of U.S. assets are controlled by individuals over 50 years old. Bankers are viewing the ‘Reverse Mortgage’ as the final opportunity to lend to the 50+ generation. In that vein, Fifth Third Bank ($141B out of Ohio) will acquire Retirement Corporation of America (RCA) – a registered investment adviser providing retirement education and planning nationwide.

- We need to revise our educational system:

o University enrollment has increased 20% over the past decade.

o University costs for tuition, fees, room, and board have risen 34% over the past 10 yrs.

o Over the past decade, University endowments have increased over 80%.

o Over the past 10 years, our Universities are spending more money on building monuments, than they are on improving the teacher to student ratio.

o Maybe Universities should be taxed like Mutual Funds – after all:

§ The top 10 University endowments are: (1) Harvard = $36B, (2) Yale = $26B, (3) Texas = $24B, (4) Princeton = $23B, (5) Stanford = $22B, (6) MIT = $13B, (7) Texas A&M = $10B, (8) Northwestern = $10B, (9) Univ. of PA = $10B, and (10) Univ. of Mich. = $10B.

§ Some Top ETFs are: (7) QQQ (NASDAQ) = $42B, (10) IWM (Small Caps) = $34B, (16) GLD (Gold) = $30B, (20) EEM (Emerging Mkts.) = $26B, (22) XLF (Financials) = $22B, and (30) XLE (Energy) = $17B

o With our universities having larger endowments than most of the ETFs out there, I think it’s time to refocus our educational system around the educator rather than around the endowment or the physical facility.

The Markets:

Animal spirits are alive and well. For the first time in my life, I'm watching a man go to Washington, and totally change the entrenched political decision-making. In the past, a President would over-promise, under-deliver, and in many cases, do a 180 degree turn against what they said on the campaign trail. Trump is definitely NOT playing that game.

But even with all of the hope, the reality of the moment is that things aren't very good, and the market is front running all the good things that are potentially coming. This week the DOW made it over 20K, and held above that level for 3 days. However, it came with anomalies that caused me to raise an eyebrow. According to the latest Bank of America data, last week U.S. equities saw $6.3B in outflows. This was the largest weekly redemption from U.S. mutual funds and ETFs in four months. So, at the very time that the DOW created all-time highs, $6.3B was pulled OUT of the markets. Also, the day we hit 20K, trading volume on the SPY (the largest ETF) was only 84m shares. The following day volume on the SPY went down to 60m shares, and on Friday it hit 59m shares. In other words, there has been no volume confirmation of this move.

So, $6.3B is leaving equities and being deployed into bonds, and we have a clean break-out to all-time historic highs on relatively low volume. These are NOT the sorts of actions that I would have expected last week. But then again, I'm using analysis based on some fundamental premises, and fundamentals went away ten years ago. Who cares if pension funds and insurance companies are pulling out – just as long as the Swiss National Bank keeps buying the DOW stocks and driving them higher. I still think that we get this last run higher, pull in more sideline sitters, and then roll over into a 10% correction.

Tips:

Over the past several weeks, I laid out a specific SPX trading strategy that I was doing. I started by selling some weekly Iron Condors (IC) – expiring January 20^th – between 2260 / 2265 and 2290 / 2295 – for between $230 and $245 per IC. I was hoping to show some of the modifications that I had to do, but the SPX acted remarkably calm – ending the week @ 2271. Therefore, I pocketed the entire $245 per contract. Last week I sold a similar set of weekly SPX Iron Condors – expiring January 27^th – between 2245 / 2250 and 2280 / 2285 for $250 per IC. The SPX went to 2295:

- This allowed our 2245 / 2250 Put Credit Spread portion of the IC to expire worthless and I pocketed the entire $130 per contract.

- BUT we had to roll out the 2280 / 2285 portion to the corresponding Feb 3^rd delta 30 options centered around the 2310 / 2315 strikes for $1.85.

- That $1.85 came directly out of the previous SPX’s $2.45 profit – reducing our profit on the Jan 27^th transaction to 60 cents.

- We are now holding the 2310 / 2315 Call Credit Spread @ $1.85 / and will sell the 2275 / 2280 Put Credit Spread against it on Monday – for an additional credit of $1.40.

I will continue this example through this week, in hopes that it should give you enough to do this on your own moving forward.

I’m attending a financial conference in Rocky Mount, NC this weekend – and will hopefully incorporate those thoughts in my upcoming trades and recommendations.