This Week in Barrons – 12-7-2014:
Thoughts:
Dear Ms. Yellen:
Are we
seeing the sunset of the U.S.’s efforts into oil shale drilling and fracking? When J.Q.
Public pulls into a gas station and saves $20 on a fill-up – he’s dancing in
the streets. But if you’re a driller and
you need to earn $70/barrel oil to break even, what do you do when oil hits $58? You stop drilling, and lay off a few hundred
workers. Halliburton just laid off another
1,000 workers with more to come. So the
idea that the reduction in gasoline is acting as a tax decrease for J.Q. Public
works – as long as J. Q. Public is not associated with the energy
industry. But the energy industry
touches:
-
Drillers and Suppliers
(drill bits, water, etc.),
-
Transporters
(truckers, pipe manufacturers and railroads),
-
Engine makers, auto
parts, and least we forget
-
The Banks and
Debt companies that have financed the rigs and equipment using $100/barrel oil
as their collateral pledge. As the
actual price of oil continues to fall below the collateral pledged – calls are
made from Banks to the companies to increase their collateral. When responses are not forthcoming: lending freezes,
margin calls go out to investors, and the credit dominos begin to fall.
The problem isn't so much
the lower prices, but rather the SPEED at which we arrived at the lower
prices. We can deal with $40/barrel oil
if we have a year and a half to prepare for it.
We just can’t deal with it when it drops $50 in 5 months. The entire energy infrastructure grinds to a
halt when the price of oil drops quickly below production costs. How can we get the word out to J.Q. Public
that we need to increase the price of oil – so that he can save his own job?
Secondly Ms. Yellen, the
new spending bill (that just came out of Congress) includes language that allows
the banks to trade their derivatives through entities that are part of the FDIC
program. This means that if those
derivatives go ‘poof in the night’ (as they did in 2008) – the banks are NOT responsible
for the losses but rather the FDIC (you and I) are. Years ago when The Glass-Steagal Act kept
investment and commercial banking separated, if a bank became too reckless with
it's investments, it alone was responsible for the punishment along with the
reward. In 2008 (when every major bank
was virtually insolvent), Uncle Sam decided to save the banks, and the bailouts
began. The bailout language suggested
that the banks would only have to pay back SOME of the money they got from
Uncle Sam. In the present legislation there
is no such language. They can lose
trillions, and not even have to return a penny to Uncle Sam. That means that it’s now the law that we pay
for their mistakes. Do you think that’s fair?
Ms. Yellen, you have the
last FED meeting of 2014 this week. With
oil falling sharply, bond yields below 2% on the 10-year, and mixed economic
data – do you think you could change the wording in your statement to be
slightly more accommodative and ‘dovish’.
I think that this could help the markets make it through the holidays
and into the New Year.
The Market:
It's been a volatile week.
We opened Monday and fell 100
points. We opened Tuesday and feel
another 225 points until the ‘banksters’ came in and we ended up just down 50
points. In total for the week, the DOW
has lost 736 points. While not earth
shattering, it is a correction of 4% from the previous Friday's
high. And in the context of the 10% October dip, prior to that event our largest
corrections were in the 3% to 5% area. Therefore, we are in the sweet spot
of where (historically) things turn around and move higher.
Also, history tells us
that this past week has a habit of being weak.
Personally, I think they took ‘weak’ to a whole ‘nother’ level, but
none-the-less the seasonality remained in place. This market has
ignored: Iran, ISIS, Ukraine, China, oil production, Washington D.C., ebola and
other global issues. Many of these
issues do not have direct economic impact on our markets in the short-term, but
psychologically they are capable of sparking panic selling.
The BRICs (Brazil, Russia,
India and China) are patiently waiting and watching the story of the western fiat
currency unfold. China has not increased
their net U.S. treasury holdings in years, but rather has been building their
gold and rare earth metal reserves. The
BRICs have:
-
Formally
discussed and started building their own world bank,
-
Talked about a
new reserve currency, and have
-
Made more non-U.S.
dollar deals for Middle Eastern oil.
The oil price slide
continues to put increasing pressure on derivative contracts. When the stock trading bots were written, not
many of them accounted for the possibility of oil falling 50% in five months. But oil isn't the only problem:
-
We are still
trying to start a war with Russia.
-
The Euro-zone is
mired in recession.
-
The Greek market
is crashing (over 11% last Thursday/Friday).
-
And China has
slowed considerably.
The old theory is: At any
point in time, the market knows all the information there is in the world and
prices its assets accordingly. But there's
always been that ‘outlier’ event – the ‘Black Swan Theory’. For example: If the market truly knows everything,
then why was the market ‘higher’ the day before 9/11? If the market knew everything, it should have
plunged for days ahead of the catastrophe. Yet it didn't.
9/11 happened – the exchanges were closed for several days, and they
opened up considerably lower.
The fact is – the market
doesn't know everything. There's always
that ‘outside the bell curve’ event that can cause problems. Oil prices are the current, slow motion Black
Swan event. I'm not saying that this market
drop was due to oil prices going lower.
I am saying that the market was ready for a correction, and the oil
price slide became the enabler to let it happen. For all the market's wisdom, no one predicted
in June (when oil was $110/barrel) that it would be below $60 in December. But there's more than just oil in play. This week we may see the FED remove the
language from their statement about keeping interest rates low for a
‘considerable period of time.’ That particular
fear had a lot of traders squaring off positions ahead of last Friday. Therefore,
oil was certainly a massive contributor to the selling, but not the only reason
for the selling.
We’ve fallen 4% in five
days. We are now just a handful of
points away from the 50-day moving averages on both the S&P and the DOW. I think we see a bit of a dip on Monday –
below the 50-day averages – and then stage a comeback rally that saves the
day. My reasons for the rally are not
fundamental, earnings or revenue based.
Historically, the second week is often the worst in December, but this
coming week is one of the best of the YEAR.
Secondly, we have a lot of hedge fund managers that are lagging the
indexes for the year. They will want to
brighten their portfolios by buying leadership, and hoping that it runs up into
yearend. Thirdly, we have the support
levels of the 50-day moving averages as our friend. And finally, the FED’s actions (and the
Q&A following their Wednesday decision) may very well be accommodative and
support the market’s march higher.
So my thoughts are that
the market marches higher in a ‘Santa Claus Rally’ sort of way. We've fallen 4% in a short period of time,
and it's extremely rare to see a 10% correction in December. I’m seeing a
flash dip hitting early, and then a ‘V’ recovery that starts us on a path to
higher stock prices into yearend.
Tips:
For next week, oil and the
indexes are coming into significant levels of support, and therefore (if we go
lower) I don’t think we will go dramatically lower. Also, next week the market will be buoyed by
the FED meeting on Wednesday and ‘triple witching’ options expiration on
Friday.
My current list of
potential candidates is as follows: Take-Two Interactive (TTWO), Deckers (DECK),
TJX Compaies (TJX), Kroger (KR), Amgen (AMGN), Gilead (GILD), Federal Express
(FDX), Nike (NKE), WYNN (trying to catch a falling knife), Chicago Bridge &
Iron (CBI), and McDonalds (MCD).
With the overall
market falling, we continue to hold our base positions in: FXY (Japanese Yen to
the downside), FXE (Euro to the downside), XLP (Consumer staples to the
upside), and XLV (Healthcare to the upside):
- FXY – March 2015 - $83 PUTS,
- FXE – March 2015 - $124 PUTS,
- XLV – January 2015 - $69 CALLS, and
- XLP – January 2015 - $48 CALLS.
For next week I’m
selling this increased volatility via Put Credit Spreads (PCS) – and playing
the upside with Butterflies – resulting in a net CREDIT to our account. For the Iron Condors listed
below – I would purchase their ends separately to take advantage of Monday’s
opening ‘dip’:
- NKE – DEC – SELL the 90/91 PCS & BUY the
99/101/102 Butterfly, (earnings are this week)
- FDX – DEC – BUY the Butterfly – 180 / 177.5 / 170 = Credit
of $0.34 (earnings are this week),
- GILD – DEC – SELL the 100/101 PCS & BUY the
106/108/109 Butterfly, OR [if down market] = GILD – DEC – SELL the 97.5/99 to
110/111 Iron Condor for $0.21,
- MCD – DEC – SELL the 86/87.5 PCS & BUY the
91/94/95 Butterfly,
- DIA – JAN – BUY the 178/180/191 Butterfly (in
anticipation of a Santa Claus Rally),
- CBI – DEC – SELL the 35.5/36 to 42.5/43 Iron Condor
for $0.15,
- NDX – DEC – SELL the 3990/4000 to 4320/4325 Iron
Condor for $1.35,
- SPX – DEC – SELL the 1910/1915 to 2050/2055 Iron
Condor for $0.75, and
- RUT – DEC – SELL the 1095/1100 to 1185/1190 Iron
Condor for $1.20.
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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