This
Week in Barrons – 7-20-2014
The False Flag
The term ‘false flag’ is hundreds of
years old and first came about during the naval battles between Spain, England and
France. In those days, they lacked radar
and other sophisticated communications systems to help identify ships. If you were sailing in a convoy, you would normally
have a lookout with a spyglass sitting in the ‘crows nest’ (typically a cloth
basket suspended from the highest mast) looking for other ships and their flags
– telling you to what nation they belonged.
It was back then, that a clever officer
of an attacking flotilla found that by taking down his own country's ‘colors’
(flag), and purposefully flying the flag of the opposing nation – would give
him the added element of surprise. That
way the lookout would be fooled into thinking that the approaching ships were
friendly; thereby allowing them to get considerably closer than if they would have
been truthfully identified. It wasn’t until the attackers started firing,
that the defenders realized the ship was flying a ‘false flag’ – and would
hurry to fire back.
Today, the most common use of the phrase
‘false flag’ describes someone doing an evil deed, and making the evil appear
as if it was perpetrated by the enemy – in order to justify taking action (against
the enemy).
In the past three weeks I have marveled
at the speed at which the world is banding together to bypass the U.S. dollar. The BRIC’s (Brazil, Russia, India & China)
Bank is now in completion, and will NOT use dollars as its medium of exchange. When the world has no choice but to use your
currency for trade, (and the various clearing houses and derivatives are all
set up to facilitate trading in that currency) you become more powerful because
the system is set up cater to your wishes. This is why U.S. sanctions are
often so damaging to other countries.
-
IF you
are forced to use U.S. dollars, and
-
IF those
U.S. dollars must clear through U.S. dollar based systems that connect to thousands
of banks and institutions around the globe, and
-
IF you are
shut off from that ability to exchange dollars, then
-
YOU are
in trouble – especially when trying to import food and obtain oil.
Therefore, holding global reserve
currency status is an incredibly powerful weapon, and has the power to bring
most countries ‘in line’. But: "Times,
they are a Changin’”, and from where I sit – much of last week points to U.S.
desperation. The U.S. cannot afford to
lose its global reserve currency status, and everyone knows it. But U.S. banks are in much worse trouble. The idea of a completely separate banking
system (BRIC’s Bank) not being run by the IMF, or the World Bank or the Federal
Reserve System – scares them into retaliation mode. They tried lashing out against the French bank
PNB with a $9 Billion fine for trading with nations we told them were forbidden. And we tried further sanctions against
Russia. Both decisions failed to play
out on the world stage as we had hoped.
In fact, rather than U.S. sanctions
causing Putin to ‘come in line,’ he is forming increasingly stronger alliances
with his BRIC nations. In the past two
weeks Putin has visited and signed reciprocal agreements with Cuba, Argentina
and Brazil. In Cuba he is turning old military bases and ports into a modern,
maritime trading hub. So instead of
bowing to the U.S., Putin is expanding the Eurasian trade zone right here in
our own backyard. Recently Germany
denounced U.S. sanctions – mostly because so many German companies are
currently doing business with Russia.
Combining Germany’s technology and precise manufacturing with Russia’s massive
resources forms a Russian-German alliance that makes major, economic sense.
Why do we continue to poke Russia in
the eye with a stick? For the past 25
years, Russia has (a) been a good neighbor to Europe, (b) supplied the Ukraine
natural gas at a discount (allowing them to siphon off even more illegally),
and (c) fought off terrorists. Why did
the U.S. decide to push NATO operations right into Russia’s backyard in Crimea
and Ukraine? Why - because our banksters
see the BRIC's abandoning U.S. policies and our currency. We gambled.
We were wrong in thinking that our European NATO allies would force
Russia to abandon their plans to merge with China and others.
To put this into perspective:
-
The
BRIC’s contain almost 3 Billion people (10X more than the U.S.), doing over $15
Trillion in GDP (18% of all global trade) and growing. Russia is the single largest country, China
the most populated, and Brazil one of the most resource rich countries on Earth. And, if these countries declare a military
alliance – they dwarf our military.
-
The
U.S. is $17 Trillion dollars in debt, with a stagnant to declining
economy. Our unfunded liabilities (medical
and social security) top $100 Trillion. And according to the latest polls, only 10% of
our population trusts our Government.
I’m hearing that the only way out is
to enter a ‘hot war’ with Russia. That
would solve two massive problems: (a) Allow for a shut down of the entire BRIC
Banking / Eurasian trade zone, and (b) give the FED someone to blame for our
economic demise. But, try as we might,
we haven’t been able to suck Putin into a military confrontation.
As soon as the Malaysian airliner
was shot down I thought: “False Flag”. As
expected everyone was blaming everyone else.
The Ukrainian Government and the U.S. were condemning Russia, while
Russia was turning blame back the other way. Why would the Russians shoot down a civilian
aircraft? They know that the entire
world would hate them for it, and would turn ‘the court of public opinion’
toward the Ukraine and the U.S. It would
make perfect sense for the Ukrainians to do it, and BLAME the Russian rebels –
putting more pressure on the Russians to be seen as evildoers that need to be
stopped.
Currently – there are many theories
and fingers being pointed:
-
Some
say it was the Ukrainians because Putin's own jet was flying that same
trajectory, and maybe they thought they could kill him.
-
Some
say it was the separatists mistaking a commercial airliner for a Ukrainian
military supply plane.
-
There's
even evidence that the pilot veered off his standard route to purposefully fly directly
over a hotspot.
-
The
good news is that Russia has continued to remain co-operative and completely engaged
in global dialogue.
I think this recent statement by
Putin (to the news agency Itar-Tass) truly sums up what is really going on in
the world: “We are implementing a system
of measures that prevent the harassment of countries that do not agree with
some foreign policy decisions made by the United States and their allies."
Stay tuned and watch for ‘False Flags’.
The Market...
These are the times that try men's
souls. On Wednesday the market pushed
itself to this year’s 17th all-time high. But Thursday saw the market drop 165 points
on the news of Israel’s invasion of Gaza, and the downing of the Malaysian
airliner in the Ukraine. On Friday, one
of two things happened – either (a) every investor decided that a blown up
civilian airliner in a military hotspot, and a ground invasion of thousands of
homes in Gaza meant nothing; therefore, they decided to buy the dip, OR (b) the
same hand that has pushed this market higher in the face of every economic ill
you can imagine – made it happen once again.
I’m personally learning towards ‘Door Number 2’.
Virtually every single indicator
concerning the health of our markets is flashing danger. Reports tell us that the chance of an ‘outlier
event’ preceding a market fall are extremely high. Numbers prove that corporate buybacks and FED
policy have been by far the major influencing factors for this market going
higher. ‘Unidentified futures buying’ by
someone with ‘deep pockets’ consistently comes out of the blue to ‘buy the dip’
and rescue the markets. Banks have
virtually created earnings out of thin air by being allowed to mark their
assets to ‘model’ rather than to ‘market’. I wonder, what would cause the market to stop
moving higher? We know that it isn’t:
lousy economic reports, bad housing numbers, declining consumer confidence,
horrific retail sales, a NEGATIVE Q1 GDP report, companies missing earnings,
ground wars, or a downed civilian airliner.
The standard line of thinking is
that as long as Interest rates are this low, investors have no choice but to
buy stocks, since bonds don't pay anything. Yes, that is true, but all investors have seen
‘bubbles’ where stocks have fallen 50% or more. While everyone says: “This time it’s
different.” We all know that: “Bubbles
pop with the right pin.”
As the phrase goes: “Don’t fight the
tape.” Therefore, it’s becoming more and
more likely that buying the dips will be in vogue through the end of the
year. I continue to look for the
ten-year bond to remain below 3.5%. The
U.S. equity markets (in normal times) are simply a discounting mechanism for earnings. As the old investor once said: “Sell the
Bugle, and Buy the War.” What this means
is that, the run-up to a major conflict (anticipation of a war) puts the markets
under pressure, but once the war begins the markets tend to rally in anticipation
of the war’s end. Currently the market
is anticipating an economic recovery; however if the recovery does not gain
momentum, the markets will selloff.
Unfortunately, the more optimistic
the market becomes – the easier it is to disappoint. It is much easier to surprise a market to the
upside, when expectations are muted. So
in addition to my worry over economic growth, housing continues to bother
me. Homebuilding is struggling to regain
momentum due to tight lending conditions, rising mortgage rates, and a lack of
momentum in new household formation. Additionally,
there has been a disturbing decline in the most recent consumer spending
numbers.
Obviously the old quote: “The trend is the trend –
until it’s NOT” – still holds true. I’m
cautiously optimistic. But I’m sitting
in a lot of cash right now. Be safe out
there.
Tips:
For this coming week – we are into earnings
season. A common technique of making
money during earnings season is to (the day before a specific company’s
earnings to be are announced): SELL a weekly Iron Condor (specific to that
company), that is 1.5 to 2 standard deviations (SD) away from the current stock
price. For example: NetFlix (NFLX) has
earnings after the bell on Monday. NFLX
is currently trading about $445 – with a standard deviation of $35. This means that this week, NFLX should move a
maximum of $35 (either higher or lower) than it’s existing $445 stock price. Now multiplying $35 by 1.5 and 2, yields $50
and $75 respectively. Therefore using
the 1.5 SD numbers – the range for NFLX is between: $395 and $495. You could SELL the $390 / $385 - $500 / $505
Iron Condor – netting you almost $0.90 per share. SELLING 20 contracts would net you a little
over $1,750 at the end of the week – providing that NFLX remained LESS than
$500 and MORE than $390. Using the 2SD
numbers – the range for NFLX is between: $375 and $515. You could SELL the $375 / $350 - $515 / $540
Iron Condor – netting you almost $1.20 per share. SELLING 20 contracts would net you
approximately $2,400 at the end of the week – providing that NFLX remained LESS
than $515 and MORE than $375. In
principle – what you’re doing – is taking advantage of NetFlix’s high ‘implied
volatility’ (IV) that proceeds their earnings release (as nobody knows what numbers
the company will report) – and then the immediate IV ‘crush’ that happens after
earnings when the world immediately knows the numbers and has settled on a firm
(new) price per share. Some other
examples for this week are:
CMG
-525 / +522.5 & -660 /
+665 Iron Condor OR
CMG -495 / +475 & -690 / +710 Iron Condor
SBUX -74 / +72 & -82 / +84 Iron Condor
FFIV -99 / +96 & -112 / +125 Iron Condor
WYNN -192.5 / +190 & -210 / +212.5 Iron Condor
Last week certainly was an interesting week, and
could foreshadow things to come. Apple (and the pinning play) was obviously a
complete disappointment to me – and I ended up holding some Apple shares as they
head into their earnings announcement on Tuesday of this week. I also did NOT like the action in the IWM (a
small cap index) early last week – so I sold out of most of my small company stocks
before the market’s move downward. We
continue to hold MNKD and DRTX, even though Ms. Yellen (during her testimony to
Congress) did single out social media and bio-tech stocks as being
over-valued. #ThanksJanetYellen. Our other option plays worked out nicely including: AMZN, BITA, BWLD, GOOGL, NUGT, SHPG, and VIPS. I’m currently sitting in an over-sized cash
position – ready to ‘pounce’ upon such earnings plays as: NFLX and CMG on Monday, AAPL and APD on
Tuesday, MMM and FFIV on Wednesday, SBUX on Thursday, and WYNN on Friday – to
name a few.
My
current short-term holds are:
-
AAPL
(Tech) – in @ $92.86 – (currently $94.49), 2%
increase / 0.5 mo.
-
ADSK
(Tech) – in @ 55.25 – (currently $57.36), 4%
increase / 0.25 mo.
-
COST (Retail) – in @ $115.12 – (currently
$117.74) 2% increase / 0.5 mo.
-
DRTX
(Drug) – in @ $13.61 – (currently $15.08), 11%
increase / 2.5 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
FEYE (Tech) – in @ $28.05 – (currently $34.52),
23% increase / 2.5 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
FET
(Energy) – in @ $30.53 (currently $35.72), 17%
increase / 2.0 mo.
-
KO (Beverage) – in @ $41.17 – (currently
$42.43), 3% increase / 0.25 mo.
-
LNG
(Energy) – in @ $57.40 – (currently $72.83), 27%
increase / 2.0 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
MNKD
(Drug) – in @ $6.35 – (currently $9.80, 56% increase / 2.75 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
- NUGT (Gold) – in @ $46.10 – (currently
$47.83), 4% increase / 0.5 mo.
o
(Put
Credit and Call Credit Spread Premiums not calculated into results)
-
PCLN (Tech) – in @ 1211.10 – (currently
$1212.78), 0% increase / 0.25 mo.
-
TLT (Bonds) – in @ 112.32 – (currently
$114.52), 2% increase / 0.25 mo.
-
TTWO (Tech) – in @ 21.10 – (currently
$23.22), 5% increase / 0.25 mo.
-
SLV (Silver) – in @ $20.17 – (currently $20.02),
-1% increase / 0.75 mo.
-
SIL (Silver) – in at 24.51 - (currently 14.24)
– no stop,
-
GLD (ETF for Gold) – in at 158.28, (currently
126.13) – no stop ($1,339 per physical ounce), AND
-
SLV (ETF for Silver) – in at 28.3 (currently 20.02)
– no stop ($21.48 per physical ounce).
To
follow me on Twitter and get my daily thoughts and trades – my handle is:
taylorpamm.
Please
be safe out there!
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