RF's Financial News

Sunday, January 15, 2017

This Week in Barrons - 1-15-2017

This Week in Barrons – 1-15-2017:

"Hey – what do I know?" … Stevie Lee Woods

Thoughts:

- Bank of America declared earnings on Friday, and it showed that their profits resulted from cost cutting versus increased revenue. So, what do you do when your company’s not doing well? You increase your stock buyback program – to drive your own stock price higher.

- December’s retail sales came in with a meager increase of 0.2%. And if you deduct the price increases for gasoline, coffee, insurance, education, healthcare, and other elements – the number of ‘things purchased’ actually declined.

- With smartphone sales slowing, SF pointed me toward Peter Thiel declaring the ‘Age of Apple’ being over. With Apple’s dependence upon the iPhone, Apple’s stock could be ‘dead money’ until their next big idea. And that needs to be larger than watches and earbuds. If Apple cornered the entire earbud market, they would only gain $10B in new revenue ($2B in profit) – a drop in the bucket to a $633B company. The smartphone market slowing is a big deal to Apple, and their investors.

- With the price of oil moving higher, I would have expected that global oil inventories would be shrinking. Instead, December’s crude oil inventories showed a doubling, and corresponding increases in gasoline and distillates as well. It seems that the only shortage we’re seeing is on the space required to store all of the oil.

But, “Hey – what do I know?”

I’m a believer in the physical metals. I would also love to believe in Bitcoin because: (a) it’s an alternative to the Dollar, Yuan, Lira, Ruble, etc., (b) it's fairly anonymous to buy, and (c) it's a way around the increased tracking and digitization of our personal spending patterns. Yet for all of those attributes, Bitcoin has been hacked, exchanges closed, and if the Internet were shut down – it would be next to impossible to use Bitcoin. Therefore, I’m back to the physical metals, and still believe that they are destined for higher prices.

On a side note, several years ago the IRS brought a lawsuit against an employer who was paying his employees with $50 U.S. minted gold coins. The employer would pay the employee in gold coins (taking the current exchange rate into account), but would only declare the face value of the gold coin on the payroll stub and income tax report. The IRS said that this was simply an elaborate scheme to avoid paying taxes. And that just because a U.S. minted coin is stamped: “$50”, “In God We Trust”, and “Legal Tender” – doesn’t mean that the coin is only worth $50. During the trial, none of the expert witnesses could put forth a more viable value for the coins other than the $50 printed on them, and the trial ended with 0 indictments out of the 160 counts brought by the government. Remember in 1925, that $50 gold coin was actually worht $50, and not the $1,200 that it is worth today. I cringe every time Deutsche Bank admits to rigging and manipulating the precious metals market, and agrees to pay another $100 million fine. As Bitcoin hit $1,000 last week, I thought that if we could just remove the Central Banksters from the manipulation business – we should be able to get Silver over $1000/oz. and Gold over $10,000/oz. But, “Hey – what do I know?”

Finally, this week the Doomsday Clock moved to just 3 minutes to midnight. The Doomsday Clock is a subjective measurement of how close the world is to nuclear war. It is updated periodically as scientists from around the world assess the threats that could lead a nation to use a nuclear device. At 3 minutes to midnight, the clock is now the closest is has been to Doomsday since 1953. At 3 minutes to midnight, the clock is even closer than it was during the Cuban Missile Crisis in 1962, when it was between 7 and 12 minutes. But, “Hey – what do they know?”

The Market:

“Forecasts usually tell us more about the forecaster than the future.”… Warren Buffet

According to Goldman Sachs, the top 3 major risks to a Trump presidency are:

- Risk #1 is Protectionism. If Trump stays true to his border tax agenda, the ripple would have a downward effect on the global economy.

- Risk #2 is European politics. Europe’s labor problems continue with the unemployment rate hitting almost 20% in Spain, and almost 12% in Italy. There will soon be elections in France and Germany, and the BrExit negotiations are on the horizon.

- Risk #3 is China’s increasing debt appetite. China’s rising Debt-to-GDP ratio and declining cash inflows are globally concerning – see below.

The timetable for many of Trump’s presidential reforms is as follows:

1. (Mid-January) 2017 Budget and Foundation for Obamacare Repeal

2. (January-February) Approval of Trump Cabinet Nominations

3. (January-February) Regulatory Reforms

4. (February) Supreme Court Nominee

5. (February) Tax Reform Process Begins

6. (February) Actual Obamacare Repeal Vote

7. (February) Trump Budget

8. (February) Trump State of the Union Address

9. (February-March) Dodd-Frank Repeal Bill Moves Forward

10. (Mid-March) U.S. Debt Ceiling will be Hit

11. (Early-April) New Budget Resolution and Tax Reform

12. (April) Trade Battles

13. (Late-April) Potential Government Shutdown?

Investors are overly optimistic on how low Trump can actually cut taxes. The debate over the federal deficit is going to kick off in March, and Congress will begin to push back on Trump’s proposals – as they would cause a significant increase in the size of the deficit. According to Goldman Sachs: Trump has proposed to cut the corporate tax rate from the current 35% to around 15%. While that is seen as a slight boost to corporate earnings, the federal deficit would balloon by 60% to $1T in 2017. It’s the increased deficit that could be the focus of a government shutdown in late April. Goldman believes that the S&P will peak at 2,400 in March, and will end 2017 around 2,300.

The S&P began the week at 2,273, and ended it at 2,274. For the past month, the DOW and S&P have traded sideways – not willing to breakdown or breakout. And with earnings season starting, these next several weeks will be filled with chop. The establishment is pushing back against Trump, and I can't see them rewarding him with higher markets for much longer. For the next several weeks, I'm going to play the markets with ETF's such as: DIA, SPY, SPX, IWM, RUT, QQQ, NDX and some of their inverses such as DOG and SH. If a trend develops, I may dabble in TWM, SDOW and SPXU. Until I see a trend in either direction, I’ll take what the market’s indices give me within their ranges.

Lastly, our FED has raised interest rates 2 times in the past 10 years. What happens to the economy if the FED gets aggressive and tosses 3 or 4 rate increases at President Trump? Aggressive rate increases within short time periods would derail virtually anything Trump would be trying to accomplish. And what if our FED also stopped buying stocks? And what if our FED had their other Central Banksters begin to SELL our market? It’s just something to consider. Take care and stock up on popcorn, this show is just getting started.

TIPS:

Last week a reader asked me how I trade the indexes for income on a weekly basis? My basic income strategy is to: (a) Sell PUTS (Put Credit Spreads) on down-moves in Bullish markets, and to (b) Sell CALLS (Call Credit Spreads) on up-moves in Bearish markets. In markets with low volatility (such as this one), the premiums paid for selling regularly positioned options (such as delta 10s and delta 14s) are just too low, causing the risk reward not to make sense. That is to say, one small mistake in any one trade – will cost you all of the profits from the previous 8 good ones. Therefore, in this environment, I sell Iron Condors with their inner strike ‘closer to the money’. I sell the inner strike in the low delta-30s and the outer strike in the upper delta-20s. That gives me as close to a 1:1 risk to reward relationship as possible. Then if one side of the trade goes bad:

- (a) you have enough money on the other side of the trade to either roll it, or

- (b) buy it back and still remain even to profitable.

Depending upon market trend, I take corrective action as soon as one of the inner strikes moves into the money and exceeds a delta of 50.

I only use this strategy on the major indices (SPX, NDX, RUT, DIA, SPY, QQQ, and IWM) due to liquidity, and during earnings season they tend to be slightly less volatile. An example of such a trade would be last Thursday:

- I sold the SPX, January 20^th, 2260 / 2265 to 2290 / 2295 Iron Condors for between $2.30 and $2.45.

- As of Friday, the SPX ended the day @ 2275, and is estimated to move less than 21 points in either direction prior to Friday the 20^th.

In next week’s newsletter, I will highlight any modifications I do to this trade in order to better show you how to create income streams using this same technique.

For this coming week, I’m watching:

- NFLX (NetFlix) = With it being at all-time-highs, and with earnings on Wednesday, you may see it pop higher on Tuesday.

- TSLA (Tesla) = It’s moving higher on the back side of a short squeeze.

- NASDAQ = A weekly squeeze just fired long; therefore, watch for continued upside on the NDX and QQQs.

- RIG = I’m looking for a move from 15.5 up into resistance @ 17 this week.

- AZO (AutoZone) = I’m hoping for a drop into $722.23 or even $754.82 so that I can buy it – with a target up into $807.55.

- MSFT (Microsoft) = It looks to be poised to turn higher this coming week.

- GLD (Gold) = When we touched $1,120 we started moving to the upside. I’m currently looking for a $1,206 target and then an extension to $1,255.

- The U.S. Dollar (currently @ $101.18) is in the process of pulling back to the mean @ $99.70 (chart on the left) – but on a monthly chart (on the right) it remains bullish.

With traders hating uncertainty, I think the looming inauguration will keep any rally in check this week.

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!

Disclaimer:

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Sunday, January 8, 2017

This Week in Barrons - 1-8-2018

This Week in Barrons – 1-8-2017:

“Nobody knows where the market is going. It’s your job to know what to do when it gets there.”… Raghee Horner

Remember when Mr. Spock was the logical one. This week SF and I attempted to put some logic around President Obama's Affordable Care Act and the decreasing U.S. unemployment rate. Was Obamacare (with its employer mandate) simply a piece of a larger employment puzzle? What if Obamacare was designed to decrease the unemployment rate? Currently the U.S. has a large part-time workforce. FED Chair Yellen has talked about part-time workers being at ‘very high levels’ during each of her last three press conferences, at nearly every speech in the last six months, and in both of her past two Congressional testimonies. Excluding the Great Recession, the millions of Americans who work part-time but want full-time jobs are at their highest level in 30 years. Experts believe the current number of part-timers is a ‘new normal’, and can be referred to as ‘hidden unemployment’. These part-timers are OFF the unemployment line – yet over 25% of them are living in poverty. Most part-timers are: (a) paid less per hour than full-time workers, (b) will lose their jobs before full-time workers, and (c) are given no health benefits or paid time off.

The key provision that ties Obamacare to the unemployment rate is the one that requires employers to offer health care coverage to employees who work 30 hours or more per week – or pay a $2,000 per employee penalty. To avoid paying the penalty or health coverage, companies like Walmart, Target, Home Depot, and a host of others lowered the number of hours that employees worked (making them part-timers). The number of part-timers has seen over a 50% increase since the pre-recession years. I think that the mandatory insurance provision within Obamacare contributed to the increase in part-timers. Correspondingly, I believe that repealing Obamacare will have the ‘unintended consequence’ of INCREASING the unemployment rate because: (a) In order to avoid the insurance mandate, employers would have hired multiple part-timers instead of a full-time employee, and (b) Once the insurance mandate goes away, employers will then return to hiring full-time employees (rather than the multiple part-timers) – returning part-timers back to the unemployment line.

Therefore, if Obamacare is repealed/replaced without the employer mandate, then look for a decrease in the number of part-timers, and the unemployment rate to rise.

Coincident with this, the Senate is holding hearings on foreign cyber threats to the U.S. The hearings are producing a definite ‘Russians are Evil’ theme. The hearings are telling us that the U.S. only DEFENDS itself, and does NOT attempt to influence other nations. Political scientist Dov Levin (a postdoctoral fellow at the Institute for Politics and Strategy at Carnegie Mellon University) found that the U.S. attempted to influence as many as 81 foreign elections between 1946 and 2000. Often covert, these efforts included everything from CIA operatives running successful presidential campaigns in the Philippines in the 1950s, Chili in the 1960s, and Haiti in the 1990s – to leaking damaging information on the Sandinistas in order to sway Nicaraguan voters in 1990. Dr. Levin’s data came from declassified U.S. intelligence, Congressional reports on CIA activity, academic research on U.S. intelligence, diplomatic histories of the Cold War, and memoirs of former CIA officials. His research shows that the U.S. targeted the elections in 45 nations across the globe, and in the case of countries such as Italy and Japan, the U.S. directly intervened. So it doesn’t appear that the U.S. can play the cyber-victim card any time soon.

It also doesn’t appear that this witch hunt against Russia is going to stop. Let’s all hope that PM Putin bites his tongue during this provocation and remains calm. We’ve been poking the Russian bear in the eye for several years now, and Trump is the ONLY shot we have at not going to war with another nuclear power. I’m hoping that sanity prevails so that we can all: “Live long and prosper.”

The Market:

It will definitely take more than a few weeks to determine the true impact of a Trump Presidency, but it is clear that the Stock and Bond markets have reacted immediately. U.S. GDP growth in 2016 is still expected to be a meager 1.5%, with Global growth surpassing 3.1%. With tax cuts and less regulations, early forecasts for U.S. GDP in 2017 have moved up to 2.5%. Recessions are almost never forecast, but we average one every six years, and our last one was 7 years ago.

- U.S. inflation and protectionist threats have caused the global currency war to reaccelerate. A strong U.S. Dollar hinders U.S. earnings growth, and may slow the FED’s planned rate increases.

- Low earnings are clearly a function of low global GDP growth. With 50% of S&P revenue coming from outside the U.S., the strong dollar will be a considerable head-wind to growth.

- Watch the 3^rd party oil auditors for some shenanigans over the next 180 days. Cash strapped countries will see oil hit $55 a barrel, and then they will begin to flood the market with oil – dissolving the production agreement and the price.

- Watch copper as it’s often the commodity used to predict growth and corresponding inflation.

- Gold is ‘shortable’ as long as it remains less than $1,200 an ounce. Over that – the race is on to the upside.

- Thanks to Chris @ Rockhaven Capital for the following graphical display:

There is a ‘turnaround’ theme coming out of stock newsletters. Below, I’ve compiled a list of recommendations from the ones that I read:

- Crocs (CROX) = $6.85 – They have brought in new management with experience in shoes and turnaround execution. They’re closing unprofitable stores, and revamping distribution networks.

- Oaktree Capital (OAK) = $37.50 – Since 2010, companies have issued high-yield debt at record levels. With interest rates going up, and a lot of the debt coming due – it will be harder for companies to refinance that debt. Oaktree Capital specializes in refinancing and restructuring debt, has funds available, and pays a 6% dividend.

- Royal Caribbean Cruises (RCL) = $82 – Even without economic growth, cruise lines like Royal Caribbean, Carnival and Norwegian are benefiting from the aging population.

- Amgen (AMGN) = $146 – Biotech stocks were hammered on fears of government controlled drug pricing. Amgen is one of the best in the space, and is trading at just 13 times earnings. It has important drugs, a robust pipeline, and a boatload of cash for stock buybacks, funding R&D, and paying a 2.7% yield.

- Priceline (PCLN) = $1,466 – Priceline’s booking.com is the top travel website. Europe (because of its size and number of independent hotels) relies on booking.com to bring in guests. Priceline’s strong hotel network makes a good competitive advantage and barrier to entry.

- Eaton Vance (EV) = $42 – Bond funds (like EV) have performed badly as of late, and investors favor ETFs over managed funds. But if the indices stall after years of steady gains, managed bond funds such as EV could once again have their day in the sun.

The mood of the analysts continues to be rosy. I’m constantly hearing how wonderful things are, and how the market is fine to buy now. I still think the ‘powers that be’ want to get to DOW 20K for a couple days so they can bring out the hats and high five each other. On Friday, the DOW made it to 19,999.63 – 37 cents away from DOW 20K. They had their hats in hand, their kazoos tuned up, and the confetti ready – only to be delayed once again. The question is: Did we get ‘close enough’, or does it need to see an actual 20K print? I think we will attain 20K and continue to consolidate around it – prior to producing the next definitive move lower into a meaningful correction.

In 1999, it took us quite some time to wobble around, and break through DOW 10K. The market is still ‘luring in’ January 401K money. Tax selling hasn't hit yet, and momentum is still on the side of the buyer. After Inauguration Day, as earnings start to pour out, I think we will see the market pull down. Because of the market’s price and the large amount of ‘hopium’, I'm not a big believer in this market – and am forever reminded of the Greenspan quote: “Markets can remain irrational, longer than you can remain solvent.”

TIPS:

I’m reminded of a quote by Doc Severson: “Tops are a process, and bottoms are an event.” This refers to the fact that a ‘topping pattern’ takes time to develop and execute – where a bottom can be signified by an event such as BrExit or an election. The chart below and on the left shows the past year, with the Russell ‘small cap’ index on the top (purple line) leading the way higher, and the NASDAQ trailing. The chart on the right is the past week – showing a dramatic role reversal with the NASDAQ leading the way higher and the Russell falling.

With market and sector rotations being as immediate and violent as they are, it might be wise just to buy the big ETFs here. If we’re going to hit 20K – then the DIA and the SPY should move in tandem. I think that the indices are safer than individual stocks right now.

This past week there was a rotation into technology. Keep an eye on the semi-conductor ETF: SMH. I think that the technicals are going to start improving in this sector, and if so – the SMH could make a nice move higher in the near future.

I believe that a pullback is coming because:

- VOLATILITY is extremely low,

- BONDS are rallying. This should cause the financials (XLF) to sell off, but they have not (as of yet). Watch this over the next several weeks – potentially coincident with their earnings announcement(s).

- TECH is rallying prior to earnings, but a STRONG DOLLAR will be a drag on their earnings.

- The RUT (Russell small cap index) could be signaling the future – again. In November, it foretold the markets moving higher. If it continues moving lower, it will bring the rest of the markets with it.