RF's Financial News

This Week in Barrons – 7-13-2014

Don't Blink!

Things are moving at an incredible speed, and you can almost ‘feel’ that something big is coming. Some of the ideas that we have been kicking around are maturing much faster than anticipated. Six months ago I could count on one hand the number of people talking about the world abandoning the U.S. dollar. Now – not only is it being talked about, but the rate of abandonment is astonishing. The question now is: How many of our major global events are a result of the U.S. losing its global reserve currency status? Could the wars, rumors of wars, currency issues, lies, and manipulations all be because the U.S. is engaged in ‘fighting back’ against those who wish to remove her as the ‘king dollar’? I believe that this is exactly what is happening.

This week Russian President Putin blasted the ‘West’ for giving Russia ‘no choice’ but to annex Crimea – because NATO was soon to move forces into Sevastopol, and change the landscape of power in the region. He went on to say that:

- The Ukraine ‘mess’ is the result of the West's policy of constantly trying to deter Russia.

- The U.S. fines – levied against the giant French bank PNB (and therefore the French Government) were outright BLACKMAIL, and in retaliation for the French building the Mistral class war ships that Russia had ordered.

- And ended with: "The time of U.S. world domination has ended, and Russia will be reintegrating the Eurasian landmass [former USSR], while promoting better relations with Europe, which is our natural partner."

So Putin has come out publically saying that he’s had it with the U.S., and ready to “reintegrate the Eurasian landmass". But ask yourself: Why did the U.S. (who tells everyone they're all about peace) decide it had to circle Russia with missiles?

Add to Putin’s lashing out:

- France's PNB facing $9 Billion in fines from the U.S.

- Austria's largest bank announcing that their bad loan portfolio has risen over 40% this year.

- Portugal’s largest publicly traded bank missing some large interest payments, causing that stock to be halted and bringing into question the notion of any real recovery in the ‘Club Med’ countries.

- And not to be outdone, Argentina (having missed a June 30^th payment deadline) is now in a 30-day grace period where they need to come up with a $500 Million interest payment or they are legally in default (bankrupt).

So Putin is lashing out, 2 national banks are in the toilet, 1 country is ready to default – what else could one week bring us? Glad you asked. The French have signed a Franc to Yuan currency swap with China – with the head of the French Central bank declaring that the “world would be encouraged to diversity away from the U.S. dollar.” South Korea also joined in a currency swap with China – allowing all 3 countries to avoid purchasing oil in U.S. dollars.

The U.S. cannot afford to lose Global Reserve Status, but it is being forced upon us. But who (or what) will we blame for this – when it all comes apart? Remember, the Federal Reserve is NOT a government owned facility, but rather a private banking cartel. These Central Banksters are NOT going to want to take the blame when we lose our status and the dollar becomes devalued. They've seen vivid pictures of masses with pitchforks when they’ve done that to other nations. The Central Banksters need to blame someone, and it’s my guess that a lot of what we see cropping up around the world is as a result of the Central Banksters looking for ‘bad guys’ to blame.

Factually: if you go to the International Monetary Fund’s (IMF) web site, you will find a 10-year plan introducing SDR’s (Special Drawing Rights) as the new global trading currency. Officials at the World Bank, the Bank of International Settlements (BIS), and the IMF have suggested that the U.S. dollar domination has run its course. Currently China, Russia, India, Brazil, South Korea, France, England, and a dozen other countries are set up to trade bi-laterally using NO U.S. dollars. The day the entire world will effectively trade for oil in something other than the U.S. dollar is coming more rapidly than even I would have imagined.

Also, this week the Securities and Exchange Commission (SEC) finalized rules that would allow money market funds to ‘halt redemptions’ during times of stress. That’s what I would call a ‘Bail In’. So, if the economic system goes bump in the night, and you just happen to have $20k in a money market fund – they now have the right to deny you access to your money if they determine that it is ‘disruptive to the system’.

A year ago I remember making the statement: “If the Fed really does remove the stimulus – in the face of lousy economic numbers – then something major has changed". On Wednesday we learned that the Fed is on-track to end QE by October 2014. Don’t look now, but our Fed is quietly making moves that are normally associated with a rising interest rate environment – which puts our ailing economy on a definite timeline for a reset. As if to add insult to injury, on Thursday we learned that our Fed is pondering an overhaul of the method used to measure the Fed Funds Rate. The Fed Funds Rate is a benchmark that underscores virtually every global financial transaction. The interesting part of the report is that they’re now willing to consider including Eurodollar transactions. This addition would have a real substantive effect in a rising interest rate environment. So if the Fed is TRULY resetting the Fed Funds Rate methodology and including Eurodollar transactions – then (fair warning) an interest rate increase could be closer than we think.

Coincident with that, the BIS (Bank of International Settlements) in it’s annual report said: “Bringing forward the downside leg of a cycle should be considered better than letting the cycle get too big and causing more destruction in the future." Basically they said that it’s best to pop the ‘bubbles’ now, rather than let them get even bigger and be forced to deal with the aftermath.

Boiling this all down:

- I think the Fed has been instructed to pull the plug on the US stock market, but needs a ‘cover / fall guy’ to do it.

- Therefore, the Fed is causing a lot of issues around the globe in order to see what will ‘bubble up’ and who they can blame.

Our Fed still needs an escape route for ruining our currency, turning the world against dollars, and inflating multiple bubbles. It needs a ‘bad guy’ to blame for our ills, and is desperately poking all the sleeping dogs to see who bites back. Our Fed will NOT take the blame for the U.S. losing reserve status, and crashing the market bubble. They will find their scapegoats – just don’t blink.

The market...

It's been a choppy week. 3 out of the 5 days were red, and one of the green days was a ‘save’ – as the market was red all day on Friday until the last hour when they took it to green for the close. I thought that this week would include some ‘backing and filling’ of the previous week’s gains, but you could almost sense a change in atmosphere and attitude. While it is evident that someone still wants to drive the market higher (as evidenced by the tremendous amount of S&P e-mini's bought near the close on Thursday) the statistics show us that more people wanted OUT than wanted IN the market.

- On several days this week the negative to positive pressure was more than 3 to 1 to the downside.

- The volumes, which have been horrid for many months, are even worse now.

- It feels as if there aren't too many participants left who feel there's any real good reason to stay fully invested.

Because every single dip for the past couple YEARS has been a buying opportunity, to suggest that this time it’s different is almost suicidal. Going against this market has been a lesson in frustration. It is indeed hurtful when everything you have ever learned points to a market rolling over, but instead it simply soars to new, all-time highs. So it is with great caution that I suggest that maybe we haven't seen the end of the selling.

Ms. Yellen told us that they're going to halt the QE by October. In the same breath she also told us that they have other tools in their kit that will continue to keep interest rates low. The truth is – I would suggest that we all keep a close eye on the ‘interest rate’ exit doors.

This week we're going to hear from several HUNDRED companies as they release their earnings; therefore, expect some jolts, bumps and bruises for (at least) the next week or two. Earnings season is a ‘swing traders’ dream, but there’s no shame in sitting on your hands during a rocky period such as this. While Friday's green close could signal the beginning of a push higher, it felt slightly strained and contrived. So be careful out there this week.

Allow me to end with a submission from S.F.: "The Budget should be balanced, the Treasury should be refilled, Public Debt should be reduced, the Arrogance of officialdom should be tempered and controlled, and the Assistance to foreign lands should be curtailed, lest Rome will become Bankrupt. People must again learn to work instead of living on public assistance." - Cicero, 55 BC. So, evidently we haven't learned a damned thing over the past 2,069 years.

Tips:

This past week started out with us recording all of our daily trades in Twitter and in StockTwits after the market closed – but Thursday and Friday were just too busy. Apologies, and I will do better this coming week.

For this coming week – let’s discuss ‘Pinning.’ The phenomenon of a stock ‘pinning/closing’ at a specific price – that ‘just happens’ to be a particular options expiration ‘strike price’ is a frequently witnessed occurrence. Some have waived the conspiracy flag. It is (in a sense) a ‘market manipulation’ technique, but it’s not as nefarious as you might think. Pinning is the result of the ‘market makers’ hedging their portfolios to keep their portfolios neutral. You see, when you buy a call option, often there is not one just sitting there ready to buy, but rather the market maker for that stock must create a particular call option to sell to you. That’s the job of the market maker. They will (in essence) take the other side of your trade. The market maker does not want to have the risk associated with your specific call (with nothing to back it up), so they will (as a hedge) create another trading position to back them up – and often these other trading positions aggregate around a particular group of option’s strike prices.

As options expiration approaches, the most important thing for the market maker is to keep their position neutral. But, as options expiration nears – small changes in the stock can result in major portfolio changes. As the stock rises, the market maker’s portfolio will become more positive. By buying and selling stock (to become ‘more’ and ‘less’ positive), the market maker is trying to protect the particular set of option prices that they chose above – and to above all else – remain neutral. However, the result is the same – and that is that the stock price naturally navigates to a common strike that all market makers agree to – and the corresponding stock ‘PINS’ at that price. So, if you listen to a market maker tell the story, they are just managing their risk – but to rest of the world it looks like manipulation. The fact remains that pinning is very real and does occur.

Below is an options chain on Apple (AAPL) for this coming Friday July 18^th. As you can see, the price that market makers would ‘overwhelmingly’ like Apple to reach (186,749 call options & 99,723 put options) on Friday is $100 per share. Using this as one of your strategies for monthly expiration is not a bad idea.

To take advantage of this – with Apple currently trading at $95.22, you could: (a) purchase the stock, (b) purchase the monthly $94.29 or $95 call options, or (c) (the solution that I prefer) is to purchase the July 25^th $94.29 calls and sell the corresponding $100 or $102.14 call options (in order to reduce the premium that you’ll pay for the $94.29 calls directly) – often called a Call Debit Spread (CDS). Good luck as Apple plays out this week – before our very eyes.

It was an interesting week last week. We had some large winners (where we stayed within ourselves) with the Put Credit Spreads, and a couple losers (NFLX and FEYE) where we got a little too far ‘out over our skis’.

This week is monthly options expiration, and normally stocks trade sideways to UP on this type of week. Therefore, I’m again looking to sell premium on Put Credit Spreads, along with a ‘Pinning’ play on AAPL, and some interesting earnings plays. I’m still holding:

- AAPL – Bought: October $85, and July 25^th - $92.86, $93.57, and $94.29 Calls / Sold the $100.00 and $102.14 Calls to reduce the premium,

- AMZN – Sold the July, $315 / $310 Put Credit Spread (PCS),

- BITA – Bought the August, $45 Calls,

- BWLD – Sold the July, $150 / $145 PCS,

- COST – Bought the August, $115 Calls, and the October, $125 Calls

- FEYE – Have stock, Sold: July $31 / $29 PCS, ad the $36 CC’s (Cov. Calls),

- GOOGL – Sold the July, $150 / $140 PCS,

- LNG – Have stock

- MNKD – Have stock, Sold the July $9 / $8 PCS, and the $10.50 / $11.50 CCS,

- KO – Bought: November $39, $40, $44, and $45 Calls

- NUGT – Have stock, Sold the July $46 / $44 PCS, and the $55 / $57 CCS

- SHPG – Sold the July Monthly $205 / $200 PCS, and the $265 / $270 CCS

- USO – Bought the January 2015 $41 Calls

- VIPS – Sold the July Monthly $170 / $165 PCS

- WWAV – Bought: October $30 & $37.5 Calls

Reviewing our Past Week’s Performance:

- Mannkind Pharmaceutical (MNKD) – just filed a document with the SEC asking for approval of a merger / partnership arrangement – so watch for that stock to move a little on Monday – and then 4 to 6 weeks down the road.

- FireEye (FEYE) – corrected this past week – loosing 15% of its value. We continue to sell both PDS’s and CDS’s – but our stop loss is in the $33 area.

- Apple (AAPL) – closed at $95.22 on Friday – with tremendous open interest at $100 for this coming Friday, July 18^th. We’re playing Apple very directionally (higher) – but still selling premium where we can.

- Cheniere Energy (LNG) – took a slight pause to catch up to it’s own 8 EMA (exponentially moving average). We continue to marvel at how easy this stock is to manage.

- My energy portfolio (comprised mostly of small energy companies) continues to perform nicely, but we are thinning the heard – taking profits and letting our larger winners run (see below):

My current short-term holds (returning > 15.7% for June) are:

- AAPL (Tech) – in @ $92.86 – (currently $95.22), 3% increase / 0.25 mo.

- COST (Retail) – in @ $115.12 – (currently $118.01) 3% increase / 0.25 mo.

- DRTX (Drug) – in @ $13.61 – (currently $16.68), 23% increase / 2.25 mo.