This Week in Barrons - 6-1-2014

This Week in Barrons – 6-1-2014

I Wonder (in the end) what this Puzzle Looks Like?

One doesn't have to be the proverbial rocket scientist to feel that "something" is coming. You can sense it – almost smell it.  The pieces of an elaborate puzzle are being assembled behind the scenes, leaving it to the ‘forensic economists’ to discern just what is truly happening.

Let’s start with the interest rate situation.  At its very core, the FED decided to do QE (quantitative easing) to keep interest rates low.  Because of QE, the overnight lending rates have fallen from 6% to almost 0%.  So, would it not make sense that the minute the FED announced that they were going to ‘cut-back’ on QE that rates should have started to increase?  Logic says ‘yes’.  But the fact is, rates have only fallen.  So if interest rates are ‘falling’ during the removal of the program – why in the heck do we need the program?

But, are we truly cutting back on QE?  It just so happens that a small country – Belgium – is suddenly buying a lot of treasury holdings.  Really?  Or could it be that our FED is cutting QE in public, and then funneling billions into Belgium to purchase those extra treasuries?  Logic would say ‘yes’ given Belgium now shows treasury holdings far in excess of what they could actually buy – considering their actual GDP and no reserves.

But, what if Belgium's inflated treasury holdings have nothing to do with lower rates?   Could it be that the bond market knows the economy is in the toilet, (NEGATIVE 1% GDP in the first quarter) and is simply buying bonds because we're about to see the US enter a massive recession/depression?  Maybe the FED knows that the economy is beyond repair, and wants out of the US balance sheet ‘before’ the wheels finally come off?

Last summer I said that if the FED’s tapering of QE does not end or reverse itself by June/July of this year, then something MAJOR has changed.  I still believe that.  We all need to admit to ourselves that WITH all of the FED’s help – the U.S. economy still produced a NEGATIVE 1% GDP in the first quarter.

Looking around the globe, the BRIC's (Brazil, Russia, India and China) are determined to launch their version of a Central Bank.  This week Russia, Belarus, and Kazakhstan announced the Eurasian Economic Union (EEU).  This Union is designed to gather ex-Soviet states into a free trade zone to rival the European Union.  Currently, the three member states only comprise 2.5 percent to the Earth's population, but account for 15 percent of our total resources.  Their geographical positioning and global importance permits them to attract massive trade flows in Europe and Asia.

Combine this EEU announcement with last week’s Russia/China 30-year gas deal and the new world order is beginning to come together.  Expand the EEU to include Iran, Vietnam, Turkey and Saudi Arabia, and you have a truly global economic powerhouse that ‘excludes’ the U.S.

But what currency could they adopt?  Just this week the Deutsche Borse Group published an 84 page report titled: “Internationalizing the Renminbi: Weaving a Web for the Next World Currency”.  The Renminbi is the official currency of the People’s Republic of China.  This report speaks to the opportunity, the cross border investments, the Shanghai clearing house requirements, the implementation rules, and 27 other topics concerning bringing the Chinese currency to the world stage.  

However, don't dismiss the Russians.  I have a hunch that the Russians have considerably more gold in storage than anyone thinks, and will align themselves nicely in a gold backed venture for the new Global Reserve. 

So we have:

-       Our non-interest rate solution (QE) – that simply could be a fore-shadowing of our economic demise,

-       The formation of the ‘Eurasian’ trading block,

-       The push for China's currency to become a major player,

-       The BRIC’s development bank, and

-       The Russian/Chinese natural gas solution

This is by design – not by mistake.  My map shows all roads leading to: Russia, China, India, Iran, Saudi Arabia, Qatar, and Africa – with the U.S. being ‘left out in the cold.’

The Market:

This week we learned that our U.S economy CONTRACTED by 1% in the first Quarter of 2014.  But the more disconcerting news out of the report was:

-       The biggest boost to consumer spending (rising 3.3%) was the ‘Affordable Healthcare Act’ (Obamacare).  It’s ironic that we’re calling it ‘Affordable’ when it’s the largest increase in consumer spending.

-       Business Spending (which was initially reported as increasing 0.2%), actually contracted 7.5%.

-       And lastly, Domestic Corporate Profits FELL 13.7%, AFTER taxes.  It was the largest drop since 2008, and we all know what happened in 2008.

Some other elements that the financial news desks across the U.S. failed to report:

-       Sales of Canadian Silver Maple Leafs shattered all physical silver sales records in 2013, and just set their own monthly all-time high sales record in March of 2014.  At some point demand will catch up to supply.

-       Central Banks: The former head of the European Central bank said that the entire global economy is a scam of epic proportions.  "Former Bundesbank vice president and former European Central Bank board member Jurgen Stark told a conference that the entire world financial system is ‘Pure Fiction’ and vulnerable to collapse, built on the premise of infinite money created by central banks without regard to the goods and services available."

-       Housing Recovery: This week we learned that mortgage applications fell 1.2%, on top of last week’s fall of 2.8%.  That means that the indexes have fallen for 18 of the past 24 months.  The FHFA reported: "Refinancing’s have dropped to their lowest levels since 2008." The FDIC reported that the: "Mortgage slowdown hit bank income in Q1.  Banks' Q1 net income of $37.2B fell 7.7% from a year ago.  It's just the 2nd time in the last 19 quarters that Y/Y income has declined.”  Add to that PNC announcing it’s having the: "Worst year for mortgages since 1997".

-       Stock Market: With the S&P hitting all-time highs, it seems that the biggest buyers of stocks in the first quarter were not large investment houses, hedge funds, pension funds, or insurance funds, but rather were the S&P corporations themselves.  The S&P corporations purchased $160B worth of their own stock in stock buy-back situations.  These corporations are: (a) borrowing money at low interest rates, (b) using the borrowed funds to buy-back their own stock, (c) reducing their own outstanding stock float, (d) resulting in EARNINGS PER SHARE (EPS) increases, and often causing their individual stock prices to rise.

-       Lastly, the UK Financial Conduct Authority finally formalized what most of us already knew, when it announced that it fined Barclays £26 million for manipulating and setting the price of gold.  I’m sure a fine of £26 million to Barclays won’t even be a ‘dot’ on their quarterly financials.

It seems that the ‘political’ word has gone out (to whomever will listen) that the game plan is to keep the stock market up – at all cost.  Stocks are setting new, all-time highs despite: bad GDP numbers, bond yields crashing, and retail sales falling off a cliff.

And so it goes – until it doesn’t. 

This coming week Mario Draghi (head of the ECB) has stated that the European Union has to do something, and has mentioned implementing a version of QE (‘free money’).  Currently the EU would need to rewrite their charter in order to allow QE.  Or Draghi may have something else in mind in order to drive the Euro lower.  We’ll know by Wednesday afternoon.  From there it is right to Friday’s non-farm payroll report.  This too will bring in it’s own version of volatility.  If Draghi is all ‘talk’ and no ‘action’ – the markets could sell-off, and the metals should rise as a flight to safety.  If Draghi injects money – the markets will rise, and the metals should rise on inflation risk.  If the jobs report doesn’t thrill anyone – the results will be the same as above.

However, the wild card to the above is Ms. Yellen.  If this plays out as I predict, Ms. Yellen will halt the taper completely, and possibly even ramp-up QE.  She will see how much she can use the NEGATIVE GDP number to her favor.  Therefore, if the FED is going to keep rates at zero and QE is here to stay; then bonds will continue to be unattractive, and we could see another push into equities in search of returns.

We are indeed witnessing something never seen before.  While we've had bubbles in the past: the 1999-2000 tech bubble, and the 2005-2007 housing bubble – at least there was ‘something’ to use as an excuse for the market’s ‘overheating.’  But in this most recent 5-year blast, there has been NO basis for blame.  We cannot blame: jobs, housing, higher wages, lower inflation, world peace, or lower energy costs.  There's been nothing to spin as a good reason for the markets being at all-time highs.  If you think this won't end like: 2000 to 2002 or like: 2007 to 2008 – I suspect you’re wrong.  It will end, and end badly.  But in the meantime, I take what it gives me, and keep my fingers crossed for more.

Stay safe this week – it could be a decisive one. 

Tips:

I love MW’s assessment of the NEGATIVE 1% GDP announcement: “In a traditional market environment, a sharp NEGATIVE revision to the GDP (indicating we are heading into a recession) would have sent the equity markets down sharply.  The pre-market futures would have come under pressure, the market would have opened down ‘the limit’, trading curbs would have kicked-in, and the President would probably be making a statement in the afternoon about why this happened and possible actions by the FED. 

Yet in today’s setting (with a NEGATIVE 1% GDP reading), the market is up and quiet.  In fact, BAD news is good news, as it means MORE government stimulus and zero interest rates forever.  With the Bond Market fixing rates at zero, who (in their right mind) would buy a CD or a money market for near 0% - with inflation over 2%.  Or more importantly, who would buy the 10-Year Note at a Yield of 2.4% with CPI at 2% and real inflation over 5%.  So the market goes up on bad news, because it means the government will keep us addicted to zero rates and more stimulus.”

Factually:

-       Congrats to those of you who are still with me on MNKD – as we’ve seen the stock go to almost $9.50 on Friday before ending at $8.90.  And this is before it’s scheduled, mid-July FDA approval.  In MNKD – I’m continuing to buy stock, cover some of it with ‘covered calls’, and sell ‘in the money’ PUTS. 

-       With DRTX, I’m continuing to see it retrace to it’s previous highs.  I’m selling the $15/$12.50 Put Credit Spread – along with buying stock.

-       In TLT, I’m looking to re-enter it around 112.87.  But let’s see what this week brings in terms of bond surprises.

-       I continue to add to my small energy and tech plays below: ASX, FET, FPP, HK, NGLS, LSCC, PFIE, PQ, PVA, RFMD, SPIL, UIHC and VTNR.  My hope is to buy these stocks when they are affordable – and ‘ride them’ to when they become 3, 5 and 10X times their current prices. 

My current short-term holds are:

-       DRTX (Drug) – in @ $13.67 – (currently $15.92),         16% increase

-       MNKD – in @ $6.35 – (currently $8.90),                        40% increase

-       TLT – Waiting to enter again @ 112.87,

-       USO (Oil) – Waiting to enter again,

-       ASX (Tech) – in @ $5.81 (currently $6.44),                   19% increase

-       HK (Energy) – in @ $5.25 – (currently $6.24),              19% increase

-       NGLS (Energy) – in @ $64.47 – (currently $67.96),     5% increase

-       LSCC (Tech) – in @ $7.85 – (currently $7.91),             1% increase

-       PFIE (Energy) – in @ $4.47 – (currently $4.00),           11% decrease

-       PQ (Energy) – in @ $5.69 – (currently $6.12),               8% increase

-       PVA (Energy) – in @ $14.57 – (currently $15.18),         4% increase

-       RFMD (Tech) – in @ $7.96 – (currently $9.41),             18% increase

-       SPIL (Tech) – in @ 7.20 – (currently $7.90),                  10% increase

-       UIHC (Insurance) – in @ $16.81 – (currently $17.65),   5% increase

-       VTNR (Energy) – in @ 7.02 – (currently $9.81),             20% increase

-       SIL (Silver) – in at 24.51 - (currently 11.39) – no stop,

-       GLD (ETF for Gold) – in at 158.28, (currently 120.43) – no stop ($1,251 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 18.08) – no stop ($18.86 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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