This Week in Barrons – 1-18-2015:
Thoughts:
Dear Ms. Yellen:
Were you ‘tipped off’ in advance of last Thursday’s announcement by the Swiss National Bank (SNB) deciding to: (a) cut interest rates to negative 0.75% and (b) remove the Euro floor & ceiling cap on their currency? Obviously this threw the world into a currency avalanche as people scrambled to square out of positions. After all, prior to Thursday the Swiss Franc was pegged to the Euro, and this move by the SNB resulted in an overnight 23% spike higher for the Swiss Franc. By Friday morning two currency brokers were already declared insolvent, and one of the publicly traded companies (FXCM) was halted in pre-market trading as they tried to find capital to keep from declaring bankruptcy. The SNB believes that next week the EU will launch a form of QE, which will lower the value of the Euro. For the past 3 years, the SNB has been buying Euros to keep the Swiss Franc capped and balanced. However, if you're buying a currency that you know will be devalued, and therefore you will lose a lot of money – you can either: (a) take one for the team, or (b) decouple your currency and move on. What also is interesting to me is that for months Mr. Thomas Jordan (the headman at the SNB) has been telling the Swiss that all is well, and that they didn't need any ‘gold-backed’ currency. And then (out of the blue) they remove the peg to the Euro, cause a massive avalanche in the Swiss economy, and crush many exporters. I understand that the SNB Balance Sheet was completely out of control, and it was going to be a bloodbath when the EU announced its QE on January 22nd. But that isn't my issue. My issue is that the SNB (for 3 years) has looked their people in the eye and said point blank: “We've got your back.” Then in a flash they said: “Sorry, we changed our minds.” The SNB directly lied to the Swiss people. All those who were deluded into voting against a Swiss gold initiative in November – are now in shock because they now realize that all of the promises that the SNB made to them were lies. I’m assuming that our FED is NOT doing the same thing (behind the scenes) to us?
And what about Mr. Draghi? For 2 years, he’s been jawboning about pulling out all the stops, and going ‘all in’ for QE. Now (on Thursday January 22nd), he has everyone wondering whether he will be true to his word, or whether he’s going to be like the Swiss and stab everyone in the back. But if the SNB was willing to make such a monumental move ahead of the EU announcement, at minimum the SNB thinks that the announced EU program will indeed be big enough to bash the Euro definitively lower. So despite the EU courts giving their approval for QE (with restrictions), many now feel that Draghi’s announcement will be significant enough that everyone gets their fair share of the "Free Money Pie”.
Unfortunately Ms. Yellen, Mr. Jordan proved that the global economic situation is far beyond what most people think. In the past we could all be assured that the Central Banks would work together to promote their agenda. But because of breakdowns between the major players, we are beginning to see an ‘every man for himself’ type of attitude shaping up. We're in a fiat currency war that will end badly for everyone. In the end, I believe that it’s whoever owns physical gold that will win the war. Even Alan Greenspan can't talk fast enough about how the only real money is gold, and how not even the U.S. dollar can touch it. That's because after being a central bank insider himself, he knows that fiat currencies are avalanches waiting to happen. He is simply trying to tell us to get out of the way.
The Markets:
Factually last week:
- The Michigan Consumer Confidence survey came in at a record high of 98.2. The U.S. consumer clearly loves their lower gasoline prices.
- Citibank and Banc of America missed their own earnings estimates.
- BP is cutting 300 workers due to the drop in oil prices.
- The PPI (Producer Price Index) fell 0.3% on lower gas prices.
- J.P. Morgan missed their own earnings estimates, and announced that they had incurred yet another $1B in legal fees as investigators continued to probe JPM’s currency fraud and manipulation techniques.
- And December Retail Sales completely missed the boat as actual sales ‘decreased’ 0.9% over estimates.
Last week’s market action was ‘choppy’ to down, and there are several reasons for this:
- Investors that have been riding the ‘market gravy-train up’, have decided to lock in some profits and take money off the table.
- Earlier this week there was a question over whether the European courts would actually allow some form of QE to be enacted.
- There is a major push/pull going on between the people that believe the economy is firing on all cylinders, and those who look at the economic reports and realize we are sinking.
- There is the continued yes/no debate over whether the FED will raise interest rates this year.
- And the Central Banks themselves are manipulating the markets by ‘jawboning’, and by actually buying stocks and bonds.
The whipsaw action (in and of itself) isn’t terribly important. But when a market gets this wickedly volatile, it generally means that the prevailing trend is coming to an end. So that means that the general ‘UP’ trend that has been in place for the past 5 years – could be coming to an end. Therefore, all of this insane chop could be warning of an impending market avalanche. After all, other than ‘free money’ from the EU, India and Japan, there is very little reason for our markets to move higher. Banks and financials are missing their earnings targets. Retail sales are coming in well below estimates. And the energy sector remains weak, and getting weaker as the layoffs are starting.
This coming week should continue our market volatility. If the EU unleashes a massive QE program, it will cause a short-term market run-up that could challenge the highs of Jan 8 - 9. But it will also cause some major players to realize that the Europeans subverted their constitution and printed money just to keep the wheels from coming off their own economy. That thinking should lead to higher gold prices, and lower yields on Treasuries as the world eventually flocks to safety. But it won't be until Thursday that we hear what the Europeans are going to do. If the markets decide that the EU is doing ‘too little – too late’, then we could see the market roll over and plunge in a big way. I'm going to base any buying of gold and the mining stocks on what I hear from Europe on Thursday. If they go big, then I think the miners and gold will continue to push higher. If they go ‘quietly into this good night’, then the metals may temporarily cap here. The stage is truly set for Mr. Draghi at 8:30 am on Thursday morning.
TIPS:
Factually:
- Copper (/HG) can be used as a economic leading indicator. When the price of copper is over $3 per pound, the world economies are growing. Why? Because 400 lbs. of copper are used in each home, and 50 lbs. of copper are used in each automobile. Right now copper is $2.50 per pound, and that is telling me that overall global demand is slowing.
- The falling price of gasoline is putting (on average) $150/month additional into a family’s pocket. Since most families live paycheck to paycheck, these additional funds are being spent on restaurants such as Buffalo Wild Wings (BWLD) and Papa John’s Pizza (PZZA).
- The bond indicator (TLT) is flashing a ‘flight to safety’ sign as it is hitting all time highs.
- And gold is moving higher, which compliments the ‘red flag’ that copper is giving us in terms of a global slowdown, currency fears and a ‘flight to safety’.
The 3 C’s of trading (Comprehension + Confirmation = Confidence) will never be more apparent than over the next several quarters as many are looking for a 10 to 20% correction in the equity markets. I personally am going to:
- Begin to sell my winning puts on the Yen currency (FXY) and buy more puts on the FXE after Draghi’s January 22nd announcement – assuming that he does announce European QE.
- I also started playing NUGT (the triple leveraged gold miner ETF) this week to the long side.
- And I also re-initiated my 3% per week play on NUGT & DUST. (NUGT and DUST are the same ETFs only one is the exact opposite of the other. Therefore if you purchase both in equal quantities (thereby off-setting their stock movements) – you can then sell ‘weekly covered calls’ on both – pocketing the proceeds without fear of the underlying ETFs moving against you.
My current list of potential candidates for this week is as follows: Restoration Hardware (RH), Lumber Liquidators (LL) – look at a Feb / March Calendar trade, Costco (COST), Kroger (KR), Starbucks (SBUX), John Deere (DE), Nordstrom’s (NORD), Amgen (AMGN), and the Energy Sector ETF (XLE). I’m also looking at some after earnings plays for: American Airlines (AAL) and Federal Express (FDX). You’ll find that after earnings there will be a volatility crush and it’s the ideal time to buy a Calendar trade.
For next week I’m mainly selling into this increased volatility with:
- AMZN – JAN5 – SELL the +245/-250 to -350/+355 Iron Condor,
- GILD – JAN5 – SELL the +89/-90 PCS,
- IBB – FEB – BUY the 310 / 320 / 335 Call Broken Wing Butterfly,
- AAPL – MAR – SELL the +95/-100 PCS,
- AAL – SELL the 45 / 47 PCS – and BUY the 52.5 / 55 / 60 Call Butterfly,
- RUT – MAR – SELL the +1040/-1050 to -1290/+1300 Iron Condor,
- SBUX – FEB – BUY the 80 / 85 / 90 Call Butterfly,
- SPX – FEB – SELL the 1870 / 1870 PCS, and
- TLT – BUY in the 125 to 126.5 zone.
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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