This Week in Barrons - 8-3-2014

This Week in Barrons – 8-3-2014

Poking the Bear

Remember the fears that we’ve all heard throughout the years:

-       Russia nuking us into the stone age,

-       From the 2^nd Ice Age to Global warming,

-       From dying of AIDs to dying from the Swine flu and Ebola,

-       From air pollution to the oil supply running dry,

-       From North Korea firing nuclear weapons to nuclear reactors melting down, and

-       Fears of meteors hitting the earth to solar flares impacting our power grids.

Surprisingly: we haven’t frozen to death nor burned up, died of AIDs or Swine or Bird flu, oil has remained plentiful, and we have lived through North Korea, 3-Mile Island and Armageddon (about a dozen times).  Today, I place those fears into the same pile where I put stories about the Kardashians.

Unfortunately, headline news items no longer keep me up at night.  I worry about the things that networks are NOT telling me.  I fear that:

-       The people in charge – are of a quality generally associated with those in a substance abuse program,

-       The inmates are running the asylum, and

-       The foxes are guarding the hen house.  

In the U.S. Government, there has never been a shortage of bad people wanting to do bad things.  But in the past, good people wanting to do good things have always acted as a balance.  I fear that today – there are fewer good people. 

It is now mathematically impossible for the US. to extinguish its debts.  That only leaves two choices: (a) we inflate our currency forever – until we eventually hyper-inflate and the entire economy collapses, or (b) we default (like Argentina did this week).  Well, there is actually one more choice.  We could start a war (which the bankers would finance), blame all of our troubles on the war, and consequently enrich the military complex.  We are currently on this path.  I fear that some bad people in Washington are trying their best to ‘poke the bear’ and start WW3 with Russia in order to use that as an excuse for the economy crashing.

For the past 40 years the U.S. dollar has been in a position that should have been cherished and protected.  Instead, greed and evil prevailed and we abused our Global Reserve status.  The U.S. replaced austerity with printing more money – causing the world to form a work-around (the BRICs bank) that bypasses the U.S. dollar all together.  The U.S. cannot afford to lose its global reserve currency status – as that loss will prevent us from printing any more money.

Historically, when Governments get themselves too deep in debt, they always start up the printing presses.  When those measures don’t work (and they NEVER do) they then turn to war.  The U.S. has had a long history of causing trouble in various nations, usually over oil and resources.  Lately, we’ve been looking for trouble in Iraq, Libya and Syria, but it wasn’t until we upset the Ukrainian ‘apple cart’ that it got my undivided attention.  Why?  Honestly, I’m not all that concerned about the inner politics of the Ukraine, but I care a lot about the U.S. placing missiles closer to the Russian border, and possibly changing the global energy landscape.  If the U.S. could take over a large portion of Ukraine's gas deliveries via Liquid Natural Gas, it would hurt Russia.  And if we could drag Russia into some form of protracted military problem with NATO, they may be forced to dissolve the BRICs bank before it gets too established.  We’ve tried everything else, and now we’re looking to ‘poke the bear’ and initiate a WAR as a way out.  If we can cause a controlled war: (1) the market can crash and the FED won't be blamed.  (2) the U.S. may be able to hold onto its Global Reserve status, and (3) the U.S. may be able to fend off the BRICs and their desire to abandon the dollar. 

This is why I am more worried now, than I have been in the past 30 years.  (1) The military is in place, via the Department of Homeland Security (DHS), to control civil unrest, (2) more people than ever are on the government dole, and (3) we’ve tried every financial trick in the book to keep the wheels from coming off, and now we’re about to lose reserve status. That makes the U.S. a very dangerous place.  Last week alone we saw:

-       Argentina default on their financial obligations,

-       The Espirito Santo Bank (in Europe) post heavy losses,

-       The Challenger Lay-off Report post it's second highest reading of 2014,

-       Initial jobless claims jump 23K to 302K,

-       And most importantly for the first time, we're seeing companies begin to talk about how a loss of Russian business (or European business that trades with Russia) will start to really hurt their bottom lines.  I hope our golfing President’s handicap has gone down, because the U.S. business handicap has gone up.

In the long run, I believe that Putin will out-smart Obama, and that’s a good thing.  ‘Poking the Bear’ has never been a recipe for success, and this time is no exception.

The Market:

This market is setting up for a significant correction.  I base this premise on:

-       Leverage (margin) reaching all-time highs,

-       Low market liquidity,

-       Weak REAL job growth,

-       High REAL unemployment,

-       Increasing REAL inflation pressures,

-       Weak consumer wages,

-       Weak domestic revenue, and

-       An increase in housing prices. 

Unfortunately our ability to ‘exit our financial mess’ will NOT be FED controlled.  The laws of Supply and Demand will take over.  It really doesn’t matter whether the final straw is: (a) a foreign nation liquidating treasuries, (b) a BRIC banking transaction, (c) a national default or (d) ‘none of the above’.  Just like on Thursday and Friday, selling will propel more selling and it WILL be on high volume.

Honestly, there is a limit to what our FED can do.  They can’t bring a government back together to ‘get things done’.  They can’t force our legislature to act fiscally and solve: (a) debt ceiling limits, (b) expansive government programs, (c) a drift toward socialism rather than capitalism, (d) a horrific tax code where more and more companies are fleeing the U.S, and (e) they can’t ignore the math.

Increasing numbers of U.S. corporations are leaving the U.S. tax roles via tax-inversion strategies.  Even if the President is able to slow that exodus internally, foreign companies will simply purchase U.S. companies and then move them outside U.S. tax jurisdiction.  The tax-inversion strategy is just as much an indictment against U.S. currency and regulations as it is against our tax laws.  The BRICs (Brazil, Russia, India, and China) marketplace is the largest global market.  Given their more welcoming tax and regulatory environment, the exodus from the U.S. will only accelerate.

The correction (when it hits) will NOT be a trickle, but rather sharp and vicious.  In the past 7 sessions, we have fallen over 600 DOW points (from 17,120 to 16,493), and it appears like there is more to come.  Where does the correction end?  Great question.   The DOW 200-day moving average is at 16,322.  That might be a logical place to try and halt the slide.  But for just a ‘garden variety’ 10% correction, the DOW would have to lose 1,710 points from the recent highs, and fall to 15,390.  Remember, we haven’t seen a 10% correction in over 1,000 days.  A 20% correction equates to almost 3,500 DOW points, and do you think anyone's ready for that? 

Having spent the past 3 years without a correction, each time it is set up for one, the FED cuts it short and pushes us higher.  Will they do that again?  They could, but right now it doesn't seem like they will.

This past month’s Non-Farm Payrolls Jobs Report was ‘tarted-up’ to look better than it was.  It came in with a gain of 209k jobs, but 80k of those were via the ‘birth/death model’ – so they were fake.  The full-time vs part-time numbers were atrocious – leaving me to remain leaning toward the U6 unemployment number of 12.2% as a more representative gauge of our unemployed, rather than the U3 (6.2%) that is being reported.

This market cannot survive (at these heights) without stimulus.  Whether it’s the FED’s printing money, or companies borrowing to do buy backs – this market needs its monetary heroin.  Take the money drug away, and you will see the withdrawal symptoms.  The FED has said they'll end QE by October, and that rates will rise "sooner than many think".  This is a double whammy.  We need to consider that the market is finally running out of gas, and we could be witness to the first really serious correction in years.

Therefore, I think that we’re finally marking a ‘sea change’.  In other words, the tide has shifted from: BTFD – ‘Buy The F-!#@$#!$ Dip’ to STFR ‘Sell The F-!#$#@$ Rally.’  Yes BTFD has worked in the past, but this time it feels different to me.  Unless Ms. Yellen changes her mind on tapering and rates, what is there to keep the market up – earnings?  You’re kidding right?

Be cautious out there.  This actually smells like it could be the long, lost correction we haven't seen in years.  First, let’s see how the DOW deals with the 200-day moving average of 16,322, and watch how the S&P deals with its 200-day moving average of 1,858.  If we get a bounce early in the week, I will not be a buyer, but rather a seller into the rally – as I believe it will be a ‘dead cat bounce’.  And you'll have plenty of time to be a buyer if the FED decides to ramp this market back up to all-time highs. 

Tips:

It’s no surprise that real wages in the U.S. have flattened.  The two major factors retarding the U.S. labor market are globalization and increased productivity from technology.  You see, the value of knowledge is rising relative to less-skilled labor.  I’m seeing increased income inequality in the US, but lower income inequality globally.  For example: smart people in foreign lands (who can transmit their skills over the Internet) can do better for themselves, even as their more expensive counterparts in the U.S. continue to lose business.  I call this: ‘Revenge of the Nerds’.

In terms of what to buy and what to sell:

1.    I would advise everyone to review their portfolio and view it’s effects based upon DOW 16,322 – then DOW 15,390 – and finally DOW 13,600.

2.    Last mid-week I purchased more PUTS on the SPX, and more BONDS via TLT.  Depending upon the action when the markets open, I could very well be a buyer of more SPX puts and TLT on Monday morning as well.

3.    Play stocks to the long side that are NOT affected by the market, such as: CMG, BITA, PCLN (Sell the Aug2 – 1210/1207.5 PCS), WDC, FFIV (Sell the Aug2 – 108/106 PCS), X (Sell the Aug2 – 32/30 PCS), COST and TSLA.

4.    Look at buying Call Credit Spreads on stocks that ARE affected by the market such as:  CRM (Sell the Aug2 - 56/58 CCS), NFLX (Sell the Aug2 – 445/447.5 CCS)

My current short-term holds are:

-       AAPL (Tech) – in @ $92.86 – (currently $96.13),

-       COST (Retail) – in @ $115.12 – (currently $117.88),

-       FEYE (Tech) – in @ $28.05 – (currently $32.88) - earnings this week,

o   Purchased PUTS as a hedge

-       KO (Beverage) – in @ $41.17 – (currently $39.29),

o   Purchased PUTS as a hedge

-       LNG (Energy) – in @ $57.40 – (currently $70.20) – earnings last week,

o   Purchased PUTS as a hedge

-       MNKD (Drug) – in @ $6.35 – (currently $8.08) – earnings this week,

o   Purchased PUTS as a hedge

-       NUGT (Gold) – in @ $41.10 – (currently $43.81),

-       SPX (S&P Index) PUTS – in @ 1964.11 – (currently 1925.15 = lower is better in this case!)

-       TLT (Bonds) – in @ 112.32 – (currently $114.56)

-       SLV (Silver) – in @ $20.17 – (currently $19.52)

-       SIL (Silver) – in at 24.51 - (currently 14.00), and

-       GLD (ETF for Gold) – in at 158.28, (currently 124.38)

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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