This Week in Barrons – 5-24-2015:
Thoughts:
Dear Ms. Yellen:
Happy Memorial Day – a holiday to remember all of those who died in the service of our country. My father served in the Navy, and my wife’s father in the Air Force. The consistent, underlying theme to their actions was that they were fighting for the principles that formed the greatest nation that the world had ever seen. Principles like: personal responsibility, individuality, self-reliance, honesty, morality and many other elements that made the ‘Leave it to Beaver’ era a special (and lost) time period. To that end – ladies and gentlemen who served – I salute you.
After spending this past week in California, I can assure you that the water issues there are very real. California is going through one of the worst droughts in history, and it will affect every person in the U.S. The fertile California valley supplies enormous food stocks to our nation. It produces over 75% of the world’s almonds, and over 200 varieties of fruits, nuts and vegetables. As the drought persists, California has resisted cutting water to the farmers, but there is no way out of seeing food prices trending higher.
On a micro scale, California has a massive problem. If this situation persists and the cost of water soars to unimaginable heights or restrictions become so burdensome that people start leaving the state – then the micro problem becomes a macro problem. Can you imagine buying a home in California when the real estate agent tells you: “Oh by the way, you can only use 100 gallons of water per day or you will be fined $500 per incident." Would you want to live there? And if it gets severe enough that enough people leave, then taxes, infrastructure, police, health and human services become affected fairly quickly.
When I look at the ‘macro’ picture, food continues to climb in price and the water problems just make it worse. The biggest fallout will be the drastic reduction in inexpensive produce in our grocery stores – especially during the winter. New Jersey (the Garden State) has its ‘Jersey tomato’ and ‘sweet corn’, but nothing grows during the winter in NJ, PA, NY, CT, MA, and in over 20 other states. That's when the California produce situation will be most dramatically felt. So, what water stocks will allow us to take advantage of the shortage?
I'll be the first to admit that water stocks have not done well – because (often) nature has a way of fixing droughts on her own. But as water becomes more precious, towns and states are going to be forced to employ companies that reseal, reline, and repair aging aqueducts. New pipes are going to have to be laid because in some cities – up to 8% of the water, ‘leaks’ back into the ground.
The easy way to play the water ‘vertical’ is via the ETF labeled FIW. FIW has doubled since 2011, and can go considerably higher. CGW and PHO round out the best three ways to play water at the ETF level. Few of us think about water until it isn’t there. From drinking water to sanitation, you’ll find out quickly how important water is when you turn on the tap and nothing comes out. Think of a family of four, and what your toilet would look like in just one day without flushing.
Enjoy your Memorial Day. If you have lost someone in any of the ‘too many’ wars and skirmishes we've been in, I send my sympathies and prayers. Take the time to enjoy your family. Honor and say ‘Thank You’ to those that have passed, because all the ills that I rant about will certainly be here when you get back.
The Market:
What is really ‘going on’ in our big banks? This past week – in what passes as business as usual in 2015 – five major banks (Barclays, UBS, Citigroup, J.P. Morgan and the Royal Bank of Scotland) were fined $5.5B by the FED for rigging currency markets. That means that these same banks have been convicted and fined over $40B for: rigging the stock market, the gold market, the silver market, the LIBOR rate and now the currency markets. But no one (not even one person) is going to jail. How can that be? Excuse me, but banks didn’t push the buy or sell buttons – humans did. And that human didn’t do it unless he was told to do it – by another human. Yet, the bank gets fined, and not the person because by charging the bank (instead of the person that actually did the crime) the insiders go free and the bank’s shareholders pay the fine. The FBI was quoted as saying: "Their trader’s criminality was on a massive scale". And someone who claimed anonymity on behalf of the banks said: “We’d gladly (and most certainly will) do it again. It was just that profitable for us.” In this day and age, it’s good to be a bank. You can never do anything wrong, even when you blatantly rig a market and steal money. Al Capone would be envious.
On this Memorial Day, I’m trying to remember:
- When lying and cheating weren't the American way,
- When VA hospitals gave our brave servicemen the real treatments they deserved instead of ignoring them,
- When elected officials would tell me something resembling the truth,
- When an economic report would actually reflect the economy, and
- When a corporation's earnings were actually based upon sales of product, not buy backs and selling more corporate debt.
Factually – our stock market is at all time highs while:
- Existing home sales, durable goods orders, and retail sales – have fallen,
- The Philadelphia, Kansas City and Chicago Feds – have fallen,
- The U.S., China, and German PMIs – have fallen,
- And our GDP – has fallen, and will potentially report ‘negative’ growth when revised.
“Houston, we have a problem:”
- In terms of market pricing, it’s 34 TIMES more likely that the market falls (rather than rises) this coming week.
- In terms of market volume, the market is in its third positive week. In the past 18 months, over 60% of three-week positive episodes have switched to negative during their fourth week.
- This past week outflows from mutual funds and ETFs exceeded inflows for U.S. markets. Many investors are realizing that this economy is NOT worthy of buying over-priced stocks. Yet the Central bankers need stocks higher for the illusion of success, and to continue to sell debt. Corporations need their stocks to go higher in order to compensate their executives. Therefore, a simple recipe for investing could be – just buy stocks in companies that have enough cash to keep their own stock prices high – such as APPLE.
In terms of the FED raising rates, I’m beginning to question whether there will be a rate increase at all? In my opinion, it won’t be until 2016, and frankly, there’s a chance it doesn’t even happen then. As you all know, 2016 is an election year, and no politician will be anxious to make any sort of move that could weaken the stock market. The Fed is of course supposed to be apolitical, but board members are appointed by the President and approved by the Senate. Suffice it to say, anything they do next year will be under a microscope, and it wouldn’t surprise me at all if the Fed decides to punt any rate hikes until after the election. The Fed won’t meet again for another month, and as we know a lot can happen in that time frame. Going forward I expect things to remain choppy. We are headed full speed into summer trading, where volumes should remain depressed and movement should be slow.
The DOW and S&P have made new highs, but the ‘broad’ market hasn't really gone along for the ride. Either the S&P and DOW will stumble and fall back into the range between the highs and support at the 50-day moving averages, or the broader market will step up to the plate and join the party. The bulls will say that we’ve broken out of our range, and maintained the breakout for five days now. The bears, on the other hand, will point to a lack of conviction in following through on this breakout. And often after a long consolidation period, the ensuing breakout should lead to a relatively large move.
Where we go from here is anyone’s guess. Many were hoping to glean some clues today from the release of the Fed minutes of the April policy meeting. But the ‘highlights’ showed that some participants believed the economic weakness in the first quarter could possibly extend into Q2. In addition, many officials characterized the possibility of a rate hike in June as unlikely.
The question is this: How long can the DOW and S&P hold up, while the transports, the small caps, and the semi's lag? The reason that the broad market isn't participating in the all-time high fest is because they can't rig all the stocks to go up. It's relatively easy for our Central Banks to move the S&P to all time highs. Some well timed buys of several thousand futures contracts, and ‘up we go’. But that doesn't work for the other 4,000 (non S&P) stocks. That is why the S&P and DOW are at nosebleed highs, but things like the transports and small caps are looking terrible.
I'm still siding with the idea that they push, pull and drag the market higher. As long as the S&P remains above 2117, the breakout on the S&P is still in play. There is still some time for the broader market to catch-up. But, if it were to lose that 2117 level, I'd suspect we would see a hefty correction heading our way.
This coming week has a lot of economic reports, and if they follow the latest trends, they won't be healthy. As we know, economic reports are just works of fiction to be adjusted anyway. But I do think we could see some bigger volatility (wider point swings) as the markets try and figure out what they're going to do.
My thoughts were that we would get one last market rush higher, which would burn itself out in a ‘topping’ action – that would then start a long overdue correction. I still think that might happen. But the longer that the broader market does NOT join into the party, it lessens the odds considerably for that happening.
TIPS:
I’m currently looking at:
- TSLA (Tesla) – for a move from 250 to 260 next week. I’m looking at buying the 250 / 260 call debit spread, and selling the 245 / 235 put credit spread – just in case it trades sideways.
- JD – I thinking of buying the JUNE $32 Calls / for $3.45 and selling the diagonal against it early in the week. I’m looking for a pop to $36 – then sell the $37’s or $38’s against it.
- NFLX (NetFlix) – I see it moving up to 632 (the snow line) and that is where I will position my put credit spreads.
- CMG (Chipotle) – I think this could move much more to the downside, and am thinking of selling the $640 / $645 call credit spread. If CMG moves below $610, it could quickly take out $562.
- The Transportation Sector has: (a) broken key support, and (b) broken the up-trend line from November 2012. This is a HUGE red flag, and makes me nervous being long this market. Combine this with the decline in the ‘energy sector’, and I continue selling Iron Condors on both the SPX and RUT.
- LNG – with oil prices rolling over, I’ll be selling call credit spreads on this next week,
- NDX (QQQ) – looks strong, and as long as APPL (Apple) goes higher, companies such as SCTY (Solar City), SINA, and SPLK (Splunk) look ripe for selling put credit spreads.
I’m positioning for both a ‘choppy’ upside, and potentially a swift and brutal pullback.
I’m currently holding:
- KR (Kroger) – SOLD a June 67.5 / 70 Put Credit Spread,
- AAPL (Apple) – SOLD a June 110 / 115 to 135 / 140 Iron Condor,
- WYNN – SOLD a June 95 / 100 to 125 / 129 Iron Condor,
- CSX – BOUGHT a Calendar – May / Aug @ $38,
- IYT (Transportation Sector ETF) – sold the June 153 / 160 Call Credit Spread,
- CVX (Chevron) – BOUGHT Puts.
- NUGT – BOUGHT shares and weekly covered calls,
- ORCL – BOUGHT June $45 Calls
- RUT – BOUGHT June Butterfly @ 1190 / 1260 / 1320,
o SOLD – Iron Condor – June1 @ 1210 / 1215 to 1290 / 1295,
o SOLD – Iron Condor – June @ 1140 / 1150 to 1330 / 1340, and
- SPX – SOLD – Iron Condor – June1 @ 2070 / 2075 to 2170 / 2175,
o SOLD – Iron Condor – June @ 1970 / 1975 to 2175 / 2180,
o SOLD – Iron Condor – June4 @ 1945 / 1950 to 2185 / 2190,
o SOLD – Iron Condor – July1 @ 1890 / 1900 to 2195 / 2205,
o SOLD – Iron Condor – July2 @ 1905 / 1910 to 2180 / 2185,
o SOLD – Iron Condor – July2 @ 2005 / 2010 to 2180 / 2185,
o SOLD – Iron Condor – July @ 1900 / 1910 to 2200 / 2210,
o SOLD – Iron Condor – July4 @ 1860 / 1870 to 2235 / 2245,
o SOLD – Iron Condor – July5 @1870 / 1880 to 2230 / 2240,
o SOLD – Iron Condor – Aug @ 1840 / 1850 to 2250 / 2260.
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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