This Week in Barrons – 11-16-2014:
Thoughts:
Dear Ms. Yellen:
Are we having an ‘all out’
currency war? The reason I ask is that
I’ve seen this behavior before – where assets, commodities and debt all begin
to lose their relationship with each other – and out pops the American
Revolution, our Civil War, World War I, and World War II. With China’s announcement of ‘almost’ QE on
Friday, I think that we are in a full-out currency war with the rest of the
world.
Just when I thought the
BRIC nations (Brazil, Russia, India & China) would be rational and watch
the rest of us (Japan, U.S. and Europe) fight it out – they have now decided to
act. I was shocked when China (the
world’s fastest growing and second-largest economy) announced an interest rate
cut of 40 basis points from 6% to 5.6%. They
also freed up deposit rates – allowing savers to participate in a higher
return. And, right on the heels of
China’s announcement, Europe’s Draghi ran to the nearest microphone to say that
the ECB will go ‘ALL IN‘ – doing everything in its power to do more QE. And this even triggered India to think about
doing ‘more stimulus’.
My take away from all of
this is:
-
The global
economy is slowing – faster than I expected,
-
The world is
hurtling towards a depression – faster than I expected,
-
And every
central bank is going to try and destroy their currency in a bid to pay their
debts with cheaper money – faster than I expected.
I realize that the stock
markets will rally on the idea of more printed money, but we all know how this
ends. First it was Japan, then the U.S.,
then Japan again, now China, and soon Draghi will try his best to circumvent
the entire Euro zone Charter and find a way to print more money.
Ms. Yellen, doesn’t this
put you into a tricky situation? The
general expectation is that the Fed will raise rates at the beginning of next
year. However, with your measuring stick
of inflation (CPI) recently ticking lower to 1.7% - doesn’t this raise a
‘deflationary’ concern? And now with
China, Japan and Europe all ‘putting the squeeze on’ – couldn’t we easily see
the CPI contract to 1.5% as the dollar index spikes to 90 or higher? And won’t this ‘spike higher’ (a) widen the trade
gap, (b) negatively impact every multi-national company’s top-line revenues, and
(c) cause manufacturing jobs in the U.S. to shrink and (once again) move
abroad.
Ms. Yellen, my questions
are:
-
How long can you
take the pain of a strong dollar, and the risk of deflation?
-
And with Japan’s
announcement (last week) of them dipping into a recession – isn’t that a vote
against QE? (As an aside: One of Japan’s
latest ideas is to hand out gift cards to ‘poor people’ and let them go and
‘buy anything they want’. I can’t make
this stuff up!)
Ms. Yellen, can you tell
me again how all of this ends well?
The Market:
In a world where the BRICs
(Brazil, Russia, India & China) are joining together to form their own
financial bank and trading agreements, and as nations have attempted to move
away from the U.S. dollar – a pattern of behavior seems to have emerged:
-
Remember Libya's
Ghaddafi? He declared that he wanted to begin
to refuse the dollar. He called on all
Arab and African nations to establish a new African continent using a new
currency – the gold dinar. What was the
outcome for Mr. Ghaddafi? He was
overthrown by the U.S. government and NATO, and later killed.
-
Remember Iraq’s Saddam? He declared that he wanted to sell his oil
for Euro’s instead of U.S. dollars. What
was the outcome for Saddam? The U.S. invaded
Iraq due to terrorism and suspicion of harboring weapons of mass destruction – he
was later killed.
-
Remember Christophe
de Margerie – the CEO of ‘Total’ the huge French oil conglomerate. This
is what he said this summer concerning the purchase of oil in U.S. dollars: “It
would be good if the euro was used more. The fact that oil prices are quoted in
dollars per barrel does not mean that payments actually have to be made in that
currency. There are no valid reasons to pay for hydrocarbons in the American
national currency." He also
spoke out against the Russian sanctions imposed by the U.S. What was his outcome? He was killed in a ‘freak’ plane crash.
So, you either jump
on board with the U.S. dollar – or you end up ‘dead’ is the way that I see it.
In terms of the market, the
bottom line is that this market is grossly overbought. Central Banks are hoping
that by pushing the market to insane heights it will cure the economy's ills. It won't, but it seems like the last option at
this point. The only thing holding this market
up is the banksters and their behind-the-scenes maneuvers. I can see them pushing the market higher,
trying to keep everyone feeling good for the Holiday shopping season – but
that’s a nervous ‘hold’ for me.
If you've been in this
game as long as I have, you've seen:
-
The ‘Tech’
Bubble of the late 90's – and the resulting crash,
-
The ‘Housing’
Bubble – and the resulting crash,
-
The ‘Credit’ Bubble
– and the resulting crash / financial meltdown,
-
And now we're in
the ‘Central Bank’ bubble – it too will crash.
There is a good reason why
so many of the most respected fund managers are woefully behind the market this
year. This year most of them remained on
the ‘side lines’, or put very little of their cash to work. They are seeing the same things that I do and
that is: no volume, Central Bank rigging, and earnings created with buy-backs. This is NOT a signal of a healthy market.
This week we saw the
Chinese cut rates, Draghi go "ALL IN" on QE, and Obama shortcut the
Constitution and print trillions more dollars in order to accommodate 5 million
more ‘new citizens’. All that was enough
to send the market soaring on Friday.
History shows that we normally
levitate up through the Thanksgiving Holiday, and I could easily see them doing
that again. But, it’s going to be more
of a struggle this time. When you have
China cutting rates, Draghi starting QE, and we can't even hold a 100-point day
– you know that things are desperate.
This market is tired and heavy. I’m
going to approach this week as I did last – leaning long but with my finger
near the sell button.
I wish everyone a Happy
Thanksgiving. It’s my favorite holiday,
and I truly enjoy spending time with friends and family.
Tips:
I am not
bearish here, but I continue to feel that more consolidation is in
order. I talk to other traders, and we scratch our heads looking at
the last 5 weeks. I know it seems like ancient history, but if you recall
– remember all the gloom and doom 5 weeks ago when the S&P was at
1817? We are currently at 2071, which is 254 points ‘straight
up’ in 5 weeks. If you have traded for very long, you have seen this
game before and you know how it ends. I certainly don’t want to
fight this move as we will likely have even more upside, but everyone being so
bullish and ‘risk-on’ makes me nervous.
My current
list of potential candidates has grown from last week and is as
follows; DDD, APA, MCD, DFS, DKS, JEC, GILD, PEP, PII, WGO, ALL,
MET, PRU, KSU, ABT, AAPL, WYNN, FDX, HSY, FLR, BMY, DPS, TEX, TRV, UTX,
and KR.
I’m looking at the
following Iron Condors (all with a Risk/Reward of less than 4:1):
-
GILD – Dec1 –
92/93 to 108/109 for $0.19,
-
IBB – Dec1 –
275/277.5 to 310/312.5 for $1.18,
-
IBB – Jan 2015 –
260/265 to 325/330 for $1.15,
-
RUT – Jan 2015 –
1060/1070 to 1260/1270 for $$1.88,
-
WYNN – Dec1 –
169/170 to 190/191.5 for $0.30, and
-
WYNN – Dec 2014
– 164/165 to 194/195 for $0.20
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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