RF's Financial News

Sunday, November 22, 2015

This Week in Barrons - 11-22-2015

This Week in Barrons – 11-22-2015:

Thoughts:

Dear Ms. Yellen:

I remember when I was a kid. Our family rowboat needed a new coat of paint, and my father was NOT about to hire a painter. Instead, he asked around the paint stores, talked to people that did it ‘on the side’, and went ahead and tackled it himself. At 12 years old, I painted one entire side of the rowboat all by myself. It didn't seem odd or strange at the time – the rowboat needed to be painted and we were painting it.

Now let’s ‘fast forward’ to present day where that same DIY induced generation is in charge of corporations. The problem is: every executive team requires an annual pay raise, or they will move on to a different corporation. But what do you do if your corporate earnings stink, and your revenues stink even more? The only available avenue is for you to take advantage of the FED’s zero interest rate policy. Coming from a DIY mentality, you (Mr. / Ms. CEO) have the ability to financially engineer your own executive compensation structure and influence your own stock price – as follows:

- Your corporation borrows money at 0%, and sits on it a while.

- You link your executive’s compensation to your stock price by heavily paying your executives in stock options.

- You annually issue new stock options to the executives.

- You have the executives elect to redeem their options simultaneously.

- At that options redemption moment, the corporation announces a stock buyback program (roughly the size of the total executive option redemption) allowing management to redeem all of their own shares. Because earnings are a function of dividing income by the amount of shares outstanding, you also succeed in reducing the number of shares outstanding and therefore increase ‘earnings per share’.

- The key here is to ‘Get Out of Dodge’ (exit the corporation) BEFORE the debt comes due. After all, you’ve already spent the money that you borrowed to buy back your own stock. Macy’s (who’s stock price has been cut by 50% in the past 4 months) is an example of a company that is seeing it’s debt come due prior to increasing real sales and real earnings.

Therefore, due to the FED’s zero interest rate policy, private investors are buying into hundreds of stocks that have no real growth, falling sales, but manufactured earnings. If you wonder how widespread the above DIY behavior has become, just know that buybacks have hit an all time high. Factually, almost 60% of the 3,297 publicly traded U.S. corporations examined since 2010 have bought back their own stock. In fiscal 2014 the total combined net income of these companies was $847B. All the while the corporate buybacks and dividends for those same companies totaled $885B (more than all of their earnings combined). Currently, 78% of all executive compensation flows from stock options. I believe that earnings should come from innovation, production, and increased sales – not from corporations taking on billions in debt to buy back their own stock.

So corporations (in their lust for big paydays) have perverted and manipulated their own stock price. The ONLY thing a CEO cares about any more is a higher stock price. Not sales, not jobs, not production, not expansion – simply a higher stock price. And corporations are DIY’ing it right in front of you.

My family and I continue to think that every dollar we save by not having to pay someone to ‘Do It For Me’ – is a dollar we can use to enjoy the things we like. I was blessed to have been raised in a family where my dad was a hands-on guy and wasn't afraid to learn new things. I’m constantly being asked: “What is the best investment?” My answer is always: “Your best investment is education.” But let's narrow that down a bit. The best investment is learning how to DO THINGS YOURSELF. Nothing will give you a better return on your money than NOT having to pay someone else to do it.

The Market:

This week we learned that the NYSE is not going to execute stop loss orders after February 2016. They are selling this idea as ‘protection’ for the masses. But, let’s play a crazy conspiracy theory forward:

- There is presently a ‘full court press’ going on out there for the FED to raise rates in December as a symbol of a recovering economy.

- The FED has (however) failed and is on the ‘look-out’ for some extraordinary event on which to blame the economic weakness and therefore start more QE.

- Starting more QE ‘out of the blue’ would be a blatant admission that their 7 years of policies have FAILED, and our FED cannot FAIL.

- The FED has pimped-up the jobs reports, changed the way GDP is calculated, and modified our inflation measurements – all to create the illusion that the economy is doing fine.

I think that the FED will hike rates in December and eliminate stop loss orders in February because the FED knows something is coming on which they can blame our ills. The NYSE has been instructed to not stop people out when the market crashes, and could (therefore) create a massive loss of wealth. I realize that I sound like a conspiracy nut, but the good news is – it will only take 3’ish months for my theory to play out.

This past week:

- Deutsche Bank reported that without buybacks, earnings in the 3rd quarter would have been NEGATIVE.

- Putin offered a $50M bounty for information leading to the arrest of who made the bomb that blew up his airliner.

- The Empire State manufacturing report came in at a NEGATIVE 10.4. A less than zero reading denotes contraction. This reading was actually an improvement over October's NEGATIVE 11.36. Collectively, these readings indicate the worst manufacturing climate since March 2009.

- The Baltic Dry Shipping index has fallen from 1200 to just 537 in recent months – showing just how slow the global economy is running. In fact, reports show that we've been sending thousands of container ships back to China - empty. Those containers were supposed to be full of goods and materials, but China doesn't need or want them.

- The BlackRock Global Ascent Hedge Fund has lost 9.4% this year and investors were notified that it would be closing. The hedge fund (which as recently as two years ago had $4.6 billion in assets under management) is now almost completely cashed out and will close due to unfavorable market conditions.

- This week we found out that simply by asking a mutual fund’s manager how much money they have invested in their own fund – is actually a very accurate gauge of the success of that fund. That is to say (according to Morningstar), mutual funds where their managers invested nothing had the lowest returns, and those in which their managers had over $1 million invested had the highest returns.

- Wal-Mart announced a new service: savingscatcher.walmart.com. You can sign up for free, and anytime you buy something at Wal-Mart you put the TC# at the bottom of the receipt into the ‘savings catcher’ website. Wal-Mart will then automatically compare the items you bought to other stores in the area and if anything you purchased can be found for less somewhere else, they pay you the difference.

Whether you’re talking stocks, bonds or commodities, strange things are happening all around the globe. For example, in the gold arena I’m seeing 300 paper contracts being written for every single ounce of physical metal. This is an accident waiting to happen in the precious metals pits because the major bullion banks appear to be moving their physical gold away from the exchanges. A similar situation exists in silver – so one small spark and the precious metals could indeed be off to the races.

This week David Tepper, David Einhorn, and Stanley Druckenmiller reminded us that the market has no business being up where it is. All three of these major hedge fund players have backed away from the market – many of then reducing their exposure by over 30%. The market run-up from the August lows topped out at 2109 on the S&P. We closed Friday at 2089, a mere 20 points from that short-term top. I suspect the 2109 level will become a fairly formidable resistance area once again.

This week we have a short week as the market is closed on Thursday, and only open a half-day on Friday. Monday through Wednesday will encompass 90% of this week’s trading volume, with just 10% being saved for Friday. I expect volatility will be ‘in the air’ for sure. But allow me to get a jump on the festivities by wishing safe travels for all of you going to see loved ones. Do enjoy yourself and give thanks for being as blessed as we are. Eat, drink and enjoy each other’s company – because in the end, that is really all that matters. Please take care, be safe, and have a Happy Thanksgiving.

TIPS:

I think:

- The market will drift higher this week due to the Put/Call Ratio, the Skew, the Trin, and the VIX all being neutral,

- Crude oil will go lower to $31/barrel (currently @ $41.46),

- I will buy FOLD > 10.75,

- I will buy TRV > 116.48, and

- I will buy EA January Calls and finance them by selling some ‘in the money’ PUT options.

I am:

- Long various mining stocks: (AG, AUY, EGO, GFI, IAG, and FFMGF),

- Short the Euro via owning PUTS on FXE,

- Long the FANGs (Facebook, Amazon, NetFlix and Google),

- Long the RUT, January, Broken-Wing Butterfly (1100 / 1180 / 1250),

- Long the IWM, January, Broken-Wing Butterfly (109 / 117 / 124),

- Sold the SPY, Dec4, Iron Condor (190 / 195 to 216 / 218), and

- Sold the NDX, Nov4, Call Credit Spread (4750 / 4760).

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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Sunday, November 15, 2015

This Week in Barrons - 11-15-2015

This Week in Barrons – 11-15-2015:

Thoughts:

Dear Ms. Yellen:

To quote Marvin Gaye: “What’s Going On?” In a true carnival atmosphere, the Keynesian Central Bankers are throwing endless amounts of monetary spaghetti against the wall – hoping that some of it sticks. The ‘clapping seals’ that infest CNBC are diving for fish – directly in front of the Valuation Hall of Mirrors. And Ms. Yellen – you (The Bearded Lady) are the main attraction handing out cotton candy – trying to perpetuate the illusion of an economic recovery. This is a carnival of epic proportions where the price of money is fixed, and the games of chance are rigged. If you listen closely you can hear a faint chorus of unyielding hissing sounds – representing the deflating of American citizen’s savings and checking accounts. But unlike ‘carny games’, there are no big fluffy teddy bears for prizes when you pop the balloons – unless you’re short. But beware, the ‘People’ are feeling their power. They've got cameras and social media, and despite the fact that most employ these for narcissistic purposes, they can be harnessed to stand up to the powers-that-be. And there's so much to stand up to:

- Early in the week, the University of Missouri President resigned over his racial remarks. Otherwise the football team & coaches refused to play their game against Brigham Young, and would have cost the college $1 million.

- Then Wisconsin cut $250 million from their state’s university budget while paying $500 million for a new Milwaukee Bucks arena.

- The new national rankings for ‘personal freedoms’ came out with Canada ranking #1, and the U.S. NOT making the top 10.

- The new national rankings for ‘prosperity’ were released, with Norway ranking #1, and with the U.S. NOT making the top 10.

- A new report showing death rates for middle-aged white people dramatically increasing – being driven by an epidemic of suicides and overdoses of prescription opioids.

- At this week’s Republican debate, I was shocked to hear one of the candidates say that the FED has pushed this stock market up to please Obama. While that's only part of the situation, at least someone was brave enough to say it.

- By the way, you should tell President Obama that just hours after his Friday appearance on Good Morning America where he said: “ISIS is not getting stronger, we have them contained" – ISIS pulled off a pretty spectacular terror attack in Paris.

- And now, the first wave of Syrian refugees has landed in New Orleans, and 10,000 of them are being to be placed in 180 towns across the U.S.

Marvin Gaye is asking: “What's Going On”, and the people are saying: “I’m mad as hell, and I’m not gonna take it anymore." This feels like the 60’s. But the difference back then was it was harder to play, and not everybody considered themselves to be a star. Today we've got the look-at-me crowd, which wants the old system to tumble so they can get a chance.

Ms. Yellen, you may not think what happens in Missouri affects you, but it does. We've got an entire spectrum of disadvantaged people in America (arguably the majority) that are beginning to speak up and win. Winning begets more winning, and uncertainty causes more volatility and downside pressure to the markets. To quote Bob Dylan: “The times they are a-changin”.

The Market:

The ‘Velocity of Money’ is slower than it’s been in the past 50 years – which is why you get this:

The velocity of money (as shown by the blue, descending, real-economy line) is the speed at which money changes hands in our economy. Declining monetary velocity is indicative of severe over-indebtedness. The ascending red line denotes the phony, inflating of paper assets economy as represented by the S&P 500. The chart shows the impotence of Fed policies, and how they’ve created nothing more than a new hybrid strain of ‘1999 Tulip-Mania’ while the real economy continues its descent.

The big issue with the red (S&P 500) line on the above graph, is that any ripple event that causes a decline in asset prices will create a rush to sell, and will trigger an initial round of margin calls. Margin call selling will further reduce the value of the underlying asset – triggering more margin calls and more selling and so on. So is it any wonder why central banksters want to manipulate markets higher while forestalling any meaningful correction?

But are we in ‘free fall’? On November 2, the S&P put in a high of 2116. Since then we have fallen almost 100 points in 8 trading sessions. In fact, there was only one ‘up’ day in those 8 sessions. It's been a dramatic ‘free fall’ indeed, and begs the question: “Is there more to come?”

Most are blaming the fall on the strong jobs report that will assuredly trigger a FED rate hike in December. I'm sure there's some truth to that, but I also think we've got a combo-platter working. The retail sales numbers were bad – stores are missing earnings and cutting guidance. There's simply no real earnings power out there. When you see the company that makes parts for the Apple iPhone laying-off 10% of it's workers due to slowing iPhone sales – you know that there’s trouble.

October through December is historically the strongest period for the market. But October was so insanely strong, and the run-up so ‘out of place’ that it stole some of the November power. The problem from a technical standpoint is that they weren't just rotating out of the big caps and into the small caps, or technology into energy – but everything was falling in tandem. The Russell (small cap index) broke through its 50-day moving average on Friday. The financials (XLF) fell through their 200-day moving average. All of the stochastics are heading lower and widening, and the MACD's are below 0 and growing negative. Just looking at the charts would lead you to conclude that these markets have further to fall.

But we're all big boys and know that it wasn't the technicals or the fundamentals that pushed these markets to nosebleed levels. It was QE-1, 2, 3, the Twist, Central banks buying stocks, and Corporate buy backs. These markets were not pushed higher due to: ‘Organic revenue growth’. What is to stop the FED from doing more?

I said months ago that the market top was set in May, and would not be breeched unless there is some new form of stimulus/ponzi scheme. I think Friday's terror mess in Paris will have ‘some’ effect on the market this week, but it will not be a deciding factor. I’m seeing sector weakness at support levels. On the S&P (currently at 2023), the next stop lower would be the 50-day moving average at 2007. But here the 50-day is already below the 200-day – which is in itself a sign of weakness. In a strong market the 50-day is well above the 200-day. If 2007 fails, then it's on to 1995, and then down to 1960. But what about the upside – where could that go? I wouldn't even consider buying anything until the S&P got over 2052.

For me, I’m watching the Russell (RUT) to see if it can re-take the 1154 level. So if the Russell exceeds 1154 and the S&P gets over 2052 – then I think we can see a decent bounce back. Under those limits, the trend will continue to be lower. Be careful out there folks, there's simply ‘too much’ going on to be foolishly brave.

TIPS:

On Friday the CRB Index (that measures all of the commodities) – closed at levels we have not seen since the year 2003. A big part of this is crude oil, which is close to making new, multi-year lows. The worrisome issue is the banking industry’s $5T worth of loan exposure to the energy industry. Remember, the 2008 financial crisis was triggered by a mere $1T worth of sub-prime debt. So what continues to disturb me is what is going on in the deflationary commodity sector. Consider:

- Short positions on the Euro = Buying PUTS on the FXE.

- Long positions on the VIX (volatility index) that is showing more strength to the upside that doesn’t correlate well for stocks this coming week.

- The FANGs (Facebook, Amazon, Netflix & Google) broke through their 8-day moving averages and are touching their 21’s. If they break their 21’s – it could be a long way down.

- If this market is going to reverse, watch the NASDAQ getting over 4,550 and holding.

After Paris – gold and mining stocks are looking interesting:

- AG – BOUGHT stock @ $3.00 / and Jan, 2018 $2 Calls @ $2.30

- AUY – BOUGHT stock @ $1.83 / and Jan, 2017 $2 Calls @ $0.90

- EGO – BOUGHT stock @ $3.19 / and Jan, 2017 $3.50 Calls @ $1.10

- GFI – BOUGHT stock @ $2.30 / and Jan, 2017 $2.50 Calls @ $0.90

- IAG – BOUGHT stock @ $1.47 / and Jan, 2017 $1.50 Calls @ $0.85

- FFMGF – BOUGHT stock @ $0.29